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NEGATIVE 


NO.  94 


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Author: 

Gree 


,  Leo 


Title: 


problems 


Place: 


New  York 

Date: 

1910 


MASTER   NEGATIVE   # 


COLUMBIA  UNIVERSITY  LIBRARIES 
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ORIGINAL  MATERIAL  AS  FILMED  -    EXISTING  BIBLIOGRAPHIC  RECORD 


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Greendlinger,  Leo. 

Accountancy  problems,  with  solutions,  v.  1-2  By 
Leo  Greendlinger ...  with  introduction  by  John  E.  Loomis 
...    New  York  city,  Business  book  bureau,  IQlO-^llj 

2v.    24"=™.       C  $5,001 

"This  treatise  is  the  result  of  contributions  made  by  the  author  and  a 
number  of  other  accountants  to  the  Journal  of  accountancy,  and  now  com- 
piled and  rearranged  in  book  form." — Pref. 

Vol.  1  ia  2d  ed.  onl. 

1.  Accounting. 

iPl  10-6480 

Library  of  Congress  B^^     HFS659.G82 

©Feb. 26, 1910;  2c.  Mar.2, 191D;  A 259030;  L.  Greendlinger, N.  Y., N.  Y. 


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1 


LIBRARY 


School  of  Business 


Accountancy  Problems 

WITH    SOLUTIONS 


VOLUME  I 


By 
LEO  GREENDLINGER,  M.  C.  S. 

Instructor  in  Accountancy  in  New  York  University  School 
of   Commerce,    Accounts,  and  Finance,  and    Editor 
of  the    C.    P.    A.    Question    Department   of 
THE  JOURNAL  OF  ACCOUNTANCY 


With  Introduction  by 

JOHN  R,  LOOMIS,  C,  P.  A.  (N.  Y.) 

Ex-President  of  The  American  Association  of  Public  Accountants 


BUSINESS   BOOK    BUREAU 

13  Astor  Place,  New  York  City 
1910 


PREFACE. 

So  far  as  the  author  is  aware  this  is  the  first  attempt  to  put 
before  American  students  of  accountancy  solutions  to  practical 
problems  in  any  extensive  form.  This  treatise  is  the  result  of 
contributions  made  by  the  author  and  a  number  of  other  account- 
ants to  The  Journal  of  Accountancy,  and  now  compiled  and  re- 
arranged in  book  form.  The  book  is  divided  into  four  parts, 
namely : 


Copyright  19  lo 
By 
LEO  GREENDLINGER,  M.  C.  S 


V  m 


X.  \r  ^ 


7? 


r 


Press  of 

Andrew  H.  Kbllogg  Co. 

New  York 


Part  I  treats  exhaustively  of  the  adjustment  of  part- 
nership affairs.  This  branch  of  accountancy  has  been  so 
neglected  that  with  the  exception  of  the  meagre  treat- 
ment of  the  subject  by  Mr.  Percy  Childs,  an  English 
chartered  accountant,  there  is  no  literature  to  speak  of 
treating  of  the  adjustment  of  partnership  affairs. 
Another  reason  for  including  this  essay  is  that  it  dis- 
cusses a  subject  that  is  involved  in  many  of  the  most 
difficult  C.  P.  A.  questions.  Some  of  these  questions 
are  solved  in  the  course  of  the  essay. 

Part  II  presents  selected  American  C.  P.  A.  prob- 
lems, as  well  as  some  of  the  problems  set  by  English 
societies,  and  covers  the  period  from  1898  to  1908, 
inclusive.  The  selection  is  made  with  a  view  to  illustrat- 
ing practically  all  the  important  principles  involved  in 
the  problems  set  so  far  by  American  examining  boards. 
The  following  States  are  represented:  New  York, 
Pennsylvania,  Illinois,  Michigan,  Maryland,  Washing- 
ton, Florida  and  California. 

In  Part  III  are  one  hundred  and  five  selected  ques- 
tions and  answers  on  theory  of  accounts,  auditing,  and 
commercial  law. 

In  Part  IV  are  presented  papers  containing  the 
questions  (without  solutions)  set  by  various  State 
boards  of  accountancy,  on  practical  accounting,  theory 
of  accounts,  auditing,  and  commercial  law,  with  the 
author's  comments  on  the  makeup  of  these  papers.  The 
author  gives  in  this  part  an  introductory  essay  compar- 


f 


ing  the  New  York,  Pennsylvania  and  English  standards 
with  some  of  the  other  prevailing  standards. 

The  author  does  not  claim  to  put  forth  any  new  theories  in 
any  part  of  this  work,  but  has  followed  the  standard  forms  and 
practice.  Any  one  familiar  with  C.  P.  A.  examinations  will 
appreciate  that  it  is  a  difficult  task  to  solve  a  problem  to  suit  the 
fancy  of  every  critic.  With  almost  every  accounting  problem, 
various  views  are  possible — due  in  part  to  a  necessary  lack  of 
detail  in  presenting  the  problem — ^and  each  view  may  bring  a 
different  result.  The  author  hopes,  therefore,  that  whatever 
criticisms  of  his  solutions  are  offered  will  be  based  on  an  analysis 
of  the  problems. 

The  author  takes  this  opportunity  to  express  his  indebtedness 
to  the  editors  of  The  Journal  of  Accountancy  for  their  help  and 
assistance,  as  well  as  to  several  members  of  the  profession  for 
valuable  suggestions.  In  particular  does  he  desire  to  express 
his  thanks  and  sincere  appreciation  to  Mr.  John  R.  Loomis,  and 
Colonel  Giarles  E.  Sprague.  He  also  desires  to  express  his 
thanks  to  the  following  named  gentlemen  for  their  valuable  con- 
tributions: Professor  William  H.  Dennis,  for  contributing  to 
the  solutions  of  questions  3,  20,  and  2y ;  Mr.  William  W.  Rorer, 
for  contributing  to  the  solutions  of  questions  7  and  10 ;  Mr.  Her- 
bert G.  Stock  well,  for  contributing  to  the  solution  of  question  35  ; 
Mr.  Stephen  A.  Ulman,  for  contributing  to  the  solutions  of  ques- 
tions 9  and  12;  Mr.  Walter  A.  Bayer,  for  contributing  to  the 
solution  of  question  8 ;  Mr.  Gustave  Jacobsson,  for  contributing 
to  the  solution  of  question  13. 

The  author  wishes  to  emphasize,  lest  he  be  misunderstood, 
that  he  does  not  fully  favor  the  division  of  the  examination 
papers  into  practical  accounting,  auditing,  theory  of  accounts, 
and  commercial  law.  He  rather  advocates  the  classification  of 
the  questions  under  "  General  Accounting,"  and  "  Commercial 
Law."  In  this  book  he  has  merely  followed  the  arrangement  and 
terminology  used  by  the  State  boards. 

Leo  Greendlinger. 
New  York  University 
School  of  Commerce, 
Accounts  and  Finance, 
32  Waverly  Place, 
New  York.  N.  Y. 


December,  1908. 


"^ 


PREFACE  TO  THE  SECOND  EDITION. 

The  necessity  for  publishing  a  second  edition  of  "Accountancy 
Problems  "  has  afforded  an  opportunity  for  a  careful  revision 
of  the  text.  The  author  must  apologize  to  the  public  for  the 
typographical  errors  which  marred  the  first  edition;  in  this 
edition  these  errors  have  been  corrected.  The  author  wishes  to 
express  his  thanks  to  the  members  of  the  accounting  profes- 
sion as  well  as  to  other  classes  of  readers  who  were  kind 
enough  to  send  him  suggestions  and  comments;  he  has  made 
use  of  many  such  suggestions. 

On  page  69  an  interesting  problem  (with  solution)  in  adjust- 
ing a  burglary  insurance  loss,  which  was  set  at  the  June,  1909, 
New  York  C.  P.  A.  examination,  has  been  added. 

A  special  feature  of  the  revised  edition  is  the  inclusion  of 
the  1909  C.  P.  A.  examination  questions  of  New  York,  Pennsyl- 
vania, Maryland,  Illinois,  Michigan  and  Florida. 

The  author  hopes  that  this  edition  will  receive  from  the  public 
the  commendation  which  it  was  kind  enough  to  accord  the  former 
edition. 

L.  G. 
New  York  University, 
New  York,  February,  1910. 


illiiii 


'"% 


INTRODUCTION. 


I  have  always  been  of  the  opinion  that  one  of  the  principal 
needs  for  advancing  the  standard  of  American  accountancy  is  a 
high  grade  scientific  literature.  Our  university  schools  of  com- 
merce, which  are  now  so  flourishing,  have  done,  and  are  doing 
excellent  work  in  the  training  of  accountants.  The  American 
Association  of  Public  Accountants  has  been  successful  in  solidi- 
fying the  profession,  and  in  gaining  general  recognition  of  its 
merits.  Our  State  legislatures,  through  the  enactment  of  C.  P.  A. 
laws,  have  also  done  much  to  raise  the  standard  of  the  profession. 
All  of  these  movements  would  undoubtedly  be  accelerated  if  there 
were  in  existence  a  recognized  body  of  literature,  having  for  its 
object  the  exhaustive  discussion  of  accounting  principles,  as  they 
are  understood  and  practiced  in  this  country. 

Our  schools  of  accountancy,  and  the  ambitious  young  men 
who  are  striving  to  fit  themselves  for  the  duties  and  responsi- 
bilities of  a  certified  public  accountant,  have  had  to  depend  more 
than  appears  desirable  on  English  text  and  reference  books.  It 
is  true  that  many  of  these  books  are  of  high  value,  and  that 
American  accountants  owe  a  debt  to  English  writers,  which  they 
will  perhaps  never  be  able  to  repay.  Yet  it  remains  true  that  the 
differences  between  the  two  countries  in  terminology,  in  account- 
ing practice,  and  in  the  functions  of  accountants,  have  a  tendency 
to  reduce  the  value  of  the  English  literature  of  accountancy,  and 
its  application  to  conditions  which  were  not  in  contemplation  by 
the  authors.  American  accountants  have  their  own  peculiar 
problems  and  conditions  to  meet,  and  have  been  obliged  to  work 
out  their  own  solutions.  It  is  time  that  these  problems  and 
conditions  should  be  adequately  treated  in  a  literature  of  account- 
ancy, based  upon  the  necessities  of  American  business  methods, 
and  coincident  legal  requirements. 

I  feel  that  by  means  of  The  Journal  of  Accountancy  and  two 
or  three  works  on  accounting  subjects  which  have  recently 
appeared,  a  start  has  been  made  in  the  right  direction.  The 
tendency  deserves  all  the  support  and  encouragement  that  prac- 
ticing public  accountants  can  supply.     Apart  from  the  intrinsic 


ii!ti 


It 


f 


merits  of  any  particular  book  or  article,  the  mere  fact  of  its 
existence  gives  opportunity  for  thought  and  discussion,  which 
can  not  fail  to  broaden  and  dignify  the  profession  of 
accountancy. 

It  is  an  especial  pleasure  to  welcome  the  present  treatise  by 
Mr.  Leo  Greendlinger.  The  volume  is  'the  result,  I  understand, 
of  the  author's  experience  in  teaching  the  principles  of  account- 
ancy to  the  students  of  New  York  University  School  of  Com- 
merce, Accounts  and  Finance.  It  comes,  therefore,  as  a  con- 
tribution from  the  first  established  and  largest  university  school 
for  the  training  of  accountants.  The  New  York  State  Society 
of  Certified  Public  Accountants  twelve  years  ago  undertook  to 
assist  in  organizing  and  maintaining  this  school.  It  was  their 
hope  and  belief  that  in  the  school  there  would  originate  many 
such  volumes  as  Mr.  Greendlinger  now  presents.  The  expec- 
tation has  been  in  part  met  by  the  treatises  of  the  late  Professor 
Hardcastle,  of  Professor  Sprague,  and  of  Mr.  Whitehead,  and 
is  now  further  fulfilled  by  this  present  volume. 

The  essay  on  "  Partnership  Adjustments,"  which  is  Part  I  of 
Mr.  Greendlinger's  book,  seems  to  me  of  particular  value.  The 
problems  which  confront  accountants  in  connection  with  the 
insolvency  and  dissolution  of  partnerships,  and  the  conversion 
of  individual  firms  into  corporations  arc  often  complicated  and 
difficult.  Perhaps  no  single  class  of  problems  is  more  frequently 
met  in  practice.  The  author's  scientific  treatment  of  the  subject, 
based  on  correct  accounting  principles,  will  no  doubt  aid  many 
accountants  in  their  labors.  Students  who  are  preparing  for  a 
career  of  accountancy,  and  who  have  mastered  the  underlying 
principles  of  the  science,  may  be  recommended  to  study  thor- 
oughly, the  theories  and  problems  which  Mr.  Greendlinger  here 
presents. 

The  author,  in  his  endeavor  to  assist  the  candidates  for  the 
C.  P.  A.  degree  in  solving  practical  problems,  has  accomplished 
much  which  has  heretofore  been  neglected  by  others.  There  is  a 
peculiar  difficulty,  and  sometimes  diffidence,  in  publishing  solu- 
tions of  practical  accounting  problems,  for  the  reason  that  any 
such  problem  may  be  soluble  in  more  ways  than  one,  either  of 
which,  although  constructively  correct  in  itself,  may  be  open  to 
hostile,  and  perhaps  unjustifiable,  criticism.  It  would  be  out  of 
the  question  to  give  all  of  a  number  of  possible  solutions.  The 
most  that  any  man  can  do  is  to  present  the  one  which  in  his  judg- 


ment is  best.  The  same  difficulty  is  not  manifest  in  the  case  of 
such  topics  as  "theory  of  accounts,"  and  "commercial  law," 
where  anyone  may  readily  resort  to  standard  reference  works 
for  information,  and  may  cite  authorities  to  support  his  views. 

I  am  satisfied  that  any  student  of  accountancy  who  is  suf- 
ficiently advanced  will  find  it  well  worth  while  to  work  out  for 
himself  the  solution  of  each  of  the  practical  problems  taken  up 
in  this  volume,  and  then  compare  his  solutions  with  Mr.  Greend- 
linger's.  The  young  accountant  who  follows  this  plan  must  bear 
in  mind  that  the  proper  solution  must  be  correct,  not  only  as  to 
results,  but  also  as  to  form.  It  frequently  happens  that  simple 
arithmetic  will  enable  any  intelligent  person  to  arrive  at  the  right 
results.  The  accountant's  business,  however, — ^and  this  fact  both 
the  student  and  the  examiner  should  constantly  bear  in  mind — ^is 
to  present  the  results  in  a  form  that  is  consistent  in  itself  and  in 
harmony  with  accounting  principles. 

The  selection  and  arrangement  of  the  questions  in  this  volume 
deserve  a  few  remarks.  I  observe  that  the  author  has  included 
accounting  problems,  selected  from  the  examination  papers  of 
almost  all  the  States  in  which  C.  P.  A.  examinations  are  held, 
and  in  addition,  to  some  extent,  from  the  papers  of  the  English 
societies.  He  has  endeavored,  I  understand,  to  make  all  his 
questions  and  problems  representative  and  to  avoid  duplications, 
so  that  the  student  may  obtain  instruction  in  the  widest  possible 
range  of  subjects.  The  questions  cover  a  range  of  ten  years, 
beginning  with  1898,  and  including  a  number  of  questions  set  for 
the  first  time  in  1908.  Such  an  arrangement  has  the  distinct 
advantage  of  enabling  students  and  practitioners  to  get  a  general 
idea  of  the  standards  prevailing  in  the  various  States. 

Perhaps  among  the  important  results  to  be  hoped  for  from  the 
standpoint  of  the  profession  at  large,  by  the  publication  of  this 
volume  is  the  opportunity  it  offers  to  the  State  boards  of  exami- 
ners to  compare  their  examination  papers  with  those  set  in  other 
States.  The  State  boards  will  gain  much,  I  am  inclined  to  think, 
by  becoming  more  familiar  with  each  other's  standards,  and  by 
endeavoring  to  work  in  harmony.  At  the  present  time  a  question 
which  one  board  classifies  as  "  theory  of  accounts,"  a  second  board 
may  classify  as  "  auditing,"  and  a  third  board  again  as  "  com- 
mercial law."  While  such  confliction  prevails,  it  is  difficult  for 
a  student  to  properly  direct  his  studies,  and  it  may  prove  more 
or  less  a  matter  of  chance  whether  he  passes  his  examination  or 


not.  We  need  a  more  rigid  and  logical  classification  of  examina- 
tion topics,  and  I  hope  that  this  volume  will  aid  in  bringing  about 
such  a  classification.  In  the  C.  P.  A.  examinations  it  is  to  be 
regretted  that  many  questions  should  be  frequently  repeated,  with 
perhaps  slight  changes  in  terminology.  The  repetition  of  ques- 
tions, even  though  they  are  good  in  themselves,  naturally  encour- 
ages students  to  cram  for  the  examinations  rather  than  devote 
their  time  to  a  broad  and  thorough  study  of  accounting  science. 
If  this  book  serves  no  further  purpose,  it  will  have  performed 
a  distinct  service  to  accountancy  in  making  public  a  large  number 
of  questions,  and  thereby  eliminating  them  from  future  exami- 
nation papers. 

These  last  remarks  are  not  written  in  a  feeling  of  unfriendli- 
ness to  accountants  who  serve  as  members  of  the  State  boards  of 
examiners.  On  the  contrary  it  must  be  borne  in  mind  that  they 
serve  usually  at  a  sacrifice  to  themselves,  and  are  working  unself- 
ishly for  the  good  of  the  profession.  They  are  themselves  the 
first  to  recognize  the  flaws  in  the  present  system  of  C.  P.  A. 
examinations,  and  are  endeavoring  to  remedy  such  defects,  as 
far  as  lies  in  their  power.  Within  the  last  few  months  they 
have  founded  a  National  organization,  the  purpose  of  which  is 
to  secure  uniformity  of  standards  in  the  various  States,  and  to 
broaden  the  scope  of  the  examination  papers.  The  movement  in 
that  direction,  having  met  with  far  reaching  approval,  makes  this 
volume     by     Mr.     Greendlinger    particularly    opportune    and 

valuable. 

John  R.  Loom  is,  C.  P.  A.  (N.Y.) 


PART  I. 


" :"  (' 


New  York,  November  30,  1908. 


.Y>\ 


The  Adjustment  of  Partnership  Accounts/ 


The  English  Partnership  Act  of  1890  defines  a  partnership  as 
"  the  relation  which  subsists  between  persons  carrying  on  a  busi- 
ness with  a  view  of  profit." 

The  New  York  Statute  provides :  "  A  partnership  as  between 
the  members  thereof  is  the  association,  not  incorporated,  of  two 
or  more  persons  who  have  agreed  to  combine  their  labor,  property 
and  skill,  or  some  of  them,  for  the  purpose  of  engaging  in  any 
lawful  trade  or  business  and  sharing  the  profits  and  losses  as  well 
between  them." 

While  the  two  definitions  are  synonymous,  the  latter  for 
accounting  purposes  is  clearer;  and  in  treating  the  subject  of 
"  Adjustment  of  the  Accounts  of  Partnerships,"  it  is  of  greater 
importance,  inasmuch  as  the  language  of  the  latter  assists  in  the 
solution  of  problems. 

In  no  branch  of  accounting  (Executors'  Accounts  excepted) 
is  a  knowledge  of  law  so  essential,  as  in  the  adjustment  of  part- 
nership accounts.  It  is  to  be  regretted  that,  in  some  instances, 
the  law  is  so  framed  that  modern  principles  of  accounting  cannot 
be  applied — unless  upon  agreement  by  the  partners — without  a 
violation  of  the  law.  From  the  formation  to  the  dissolution  one 
must  necessarily  be  guided  by  the  Statutes,  and  it  is  right  at  the 
formation  of  the  partnership  that  proper  care  must  be  taken  to 
obey  the  law  and  at  the  same  time  not  to  defeat  the  objects  of 
the  partnership,  or,  what  is  more  important,  to  carry  out  the 
exact  intentions  of  the  partners.  This  phrase,  "  to  carry  out  the 
exact  intentions  of  the  partners,"  suggests  the  necessity  of  a 
written  rather  than  an  oral  agreement.  The  Statute  of  Frauds 
requires  the  agreement  to  be  in  writing  only  when  the  partner- 
ship is  to  continue  for  more  than  one  year,  but  business  men  now 
recognize  the  necessity  for  such  an  agreement  to  be  in  writing, 
regardless  of  the  time  that  the  partnership  is  to  last. 

To  frame  such  an  agreement,  to  protect  the  interests  of  all 

♦Accepted  by  the  Faculty  of  New  York  University  School  of  Commerce,  AccounU 
and  Fmance  m  fulfillment  of  the  requirements  for  the  degree  of  Master  of  Ccmimercial 
science. 


r 


Accounting  Problems  and  Solutions. 

parties  concerned,  and  at  the  same  time  to  comply  with  the  law, 
is  not  an  easy  matter,  and  many  an  expensive  litigation  could  have 
been  avoided,  if  lawyers,  who  unfortunately  in  most  cases  drew 
up  such  articles  of  co-partnership,  had  had  a  knowledge  of 
accounting.  It  often  happens  that,  were  an  accountant  to  follow 
the  articles  of  co-partnership,  he  would  do  just  the  thing  partners 
do  not  want, — not  through  fault  of  his,  but  because  the  party 
who  drew  up  the  agreement  was  ignorant  of  the  effect  it  would 
produce  on  the  books  of  the  concern,  if  followed  to  the  letter. 

In  one  case,  for  instance,  A.,  a  practicing  attorney  of  New 
York  City,  drew  up  a  partnership  agreement  for  the  firm  of  B., 
C,  and  D.,  in  which  among  other  clauses  was  one  which  read 
as  follows: 

It  is  mutually  agreed  that  if  any  of  the  partners  fail  to  invest  the 
agreed  sum  of  $3,000,  his  account  is  to  be  charged  with  6  per  cent,  interest 
per  annum  on  that  deficiency. 

The  partners  continued  in  business  for  about  nine  months 
when  they  asked  their  bookkeeper  to  make  up  a  Profit  and  Loss 
Statement.  The  latter  was  also  given  the  agreement  and  told  to 
use  it  as  a  guide.  As  the  Ledger  showed  that  C.  had  invested 
only  $2,000  he  prepared  the  Profit  and  Loss  Account  shown  on 
the  following  page  as  well  as  a  copy  of  the  respective  Capital 
Accounts. 

To  this  C.  objected,  stating  that  "  this  is  an  equal  partnership, 
and  all  profits  or  losses  occurring  in  the  business  must  go  through 
the  Profit  and  Loss  Account  proper,  in  which  case  I  would  share 
in  the  $45.00,  and  this  was  my  understanding  of  the  clause  in 
the  agreement."  The  other  partners  objected,  adding  that  they 
failed  to  see  what  difference  it  would  make,  yet  protesting  vigor- 
ously against  any  change  in  the  arrangement. 

All  this  trouble  could  have  been  avoided  if  the  attorney  could 
have  foreseen  the  ambiguity  such  a  vague  clause  might  cause. 
This  trouble  might  have  been  prevented  by  adding  to,  or  better 
by  completing,  the  unfinished  clause  with  a  statement  defining 
clearly  a  treatment  of  this  point,  i.  e.,  whether  the  partner's 
account  or  the  Profit  and  Loss  Account  was  to  be  credited.  It 
would  then  have  been  impossible  for  a  misunderstanding  to 
result.  It  is  just  such  incomplete  statements  as  these  that  cause 
troubles  when  the  dissolution  of  a  partnership  is  sought. 

Another  drawback,  usually  met  with  in  adjusting  partnership 


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Accounting  Problems  and  Solutions. 

accounts,  is  that  business  men  do  not  sufficiently  provide  for  con- 
tingencies which  may  occur  during  the  existence  of  the  partner- 
ship, or  at  its  dissolution.  As  the  partnership  agreement  is  to  be 
used  as  a  guide,  not  only  for  the  partners  themselves,  but  for 
accountants  who  may  audit  their  books,  the  agreement  should 
contain,  not  only  important  provisions,  but  minor  ones  also.  In 
the  absence  of  such  provisions  the  law  must  be  resorted  to  and, 
as  already  stated,  this  may  result  in  a  construction  opposed  to  the 
intention  of  the  partners.  The  intention  of  the  partners  at  the 
formation  of  the  agreement  is  to  be  the  sole  guide,  even  though 
the  wording  may  not  warrant  it,  provided,  of  course,  that  it  is  for 
the  benefit  of  the  whole  concern. 

Lord  Justice  Lindley  in  his  work  on  Partnership  and  Com- 
panies says  in  regard  to  this: 

In  order  to  solve  questions  arising  at  an  adjustment,  regard  must 
always  be  had  to  the  terms  of  the  partnership  articles;  but  an  express 
agreement  with  reference  to  the  taking  of  accounts  may  be,  and  frequently 
is,  only  applicable  to  the  ca«e  of  a  continuing  partnership,  and  may  not 
be  intended  to  be  observed  on  a  final  dissolution  of  the  firm,  or  even  on 
the  retirement  of  one  of  its  members  *****  that  which  has  been 
done  for  the  purpose  of  sharing  annual  profits  or  losses  is  by  no  means 
necessarily  a  precedent  to  be  followed  when  a  Partnership  Account  has 
to  be  finally  adjusted. 

FORMATION  OF  PARTNERSHIPS. 
The  usual  clauses  in  articles  of  co-partnership  are  as  follows : 

(i)  Name  of  firm. 

(2)  Place  of  business. 

(3)  Nature  of  business. 

(4)  Date  of  commencement  and  the  duration  of  the  partnership. 

(5)  Capital  to  be  invested. 

(6)  Provision  in  regard  to  interest  on  capital  invested. 

(7)  Provision  in  regarci  to  allocation  of  profit  or  loss. 

(8)  Provision  in  regard  to  withdrawals  and  how  to  treat  them. 

•         (9)  Provision  in  regard  to  admitting  a  new  partner  and  how  to 

*'  adjust  the  affairs  on  admission;    especially  if  the  goodwill 

is  to  be  taken  into  consideration,  which  usually  is  the  case. 

(10)  Provision  for  the  correct  keeping  of  records  of  all  business 

transactions,  and  the  making  of  periodical  balance  sheets. 

(11)  Provision  for  procedure  in  case  of  dissolution. 

In  connection  with  the  tenth  clause,  Dicksee,  in  his  Auditing, 
«ays: 

It  should  not  only  be  provided  that  "  proper  accounts  are  to  be  kept." 
but  that  these  should  be  kept  upon  some  adequate  system  of  double  entry. 
They  should  be  balanced  at  stated  intervals  and  audited  by  a  professional 
accountant,  and  provision  made  that  after  the  audited  accounts  have  been 
signed  by  the  parties  they  are  binding  upon  each  individual  partner,  except 
where  some  manifest  error  has  been  discovered  within  a  reasonable  time 
— say,  three  months. 


Partnership  Adjustments. 

The  fifth  provision  is  probably  the  most  important  clause;  it 
is  a  clause  on  account  of  defects  in  which  many  a  business  con- 
cern has  been  ruined  and  many  a  partnership  dissolved  before  its 
time.  The  clause  should  state  the  proportions  in  which  the  capital 
is  to  be  contributed,  and  the  proportion  in  which  it  is  to  be  shared 
at  dissolution,  or  on  the  admission  of  a  new  partner.  The  fact 
that  nothing  is  mentioned  on  this  point  is  no  prima  facie  evidence 
that  the  assets  are  to  be  divided  according  to  investments ;  on  the 
contrary,  if  nothing  is  stated,  the  assets— minus  capital— will 
have  to  be  divided  equally  among  the  partners,  based  on  the  prin- 
ciple that  accretions  of  assets  are  the  result  of  profits,  which, 
according  to  the  New  York  Statute,  are  the  result  of  combined 
labor,  combined  skill,  etc.,  of  all  partners  alike. 

The  ninth  clause  deserves  attention.  If  nothing  is  provided, 
the  cash  received  from  the  incoming  partner  in  respect  of  good- 
will may  be  treated  in  various  ways,  and  the  view  taken  will 
make  quite  a  difference  when  expressed  on  the  books  of  the  con- 
cern.   To  illustrate : 

^  A.  and  B.,  who  have  been  partners  for  five  years,  decide,  in  order  to 
mcrease  their  business,  to  admit  C.  as  an  equal  partner;  the  latter  to  invest 
a  sum  equal  to  1/3  of  their  (A.'s  and  B.'s)  capital  as  shown  by  the  books, 
and,  m  addition,  $2,000  in  lieu  of  goodwill. 

Nothing  further  being  stated,  this  goodwill  may  be  adjusted 
in  one  of  the  following  ways : 

Cash   Dr $2,000 

To  Goodwill  Cr $2,000 

For  this  sum  received  from  C,  in  lieu  of  goodwill  on 
being  admitted  to  the  firm  as  a  partner. 

This  entry  would  ultimately  be  adjusted  by  a  charge  to  the  Good- 
will Account  and  a  credit  to  the  Profit  and  Loss  Account.    Or : 

Cash    Dr $2,000 

To  A.,  Cr $1,000 

To  B.,  Cr i^ooo 

For  the  cash  received  from  C,  on  being  admitted  as  a 
partner. 

In  the  latter  case  only  the  original  partners  share  in  the  good- 
will which  C.  paid  in,  and  rightly  so,  while  in  the  former  case 
C.  would  ultimately  also  share  in  it;  it  is  therefore  of  great 
importance  to  have  a  provision  for  the  treatment  of  this  goodwill. 

Dicksee  in  his  Advanced  Accounting  suggests  that  in  addition 

5 


V 


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Accounting  Problems  and  Solutions. 

to  the  clauses  ordinarily  found  in  articles  of  co-partnership  the 
following  be  inserted: 

(i)  That  the  firm's  accounts  shall  be  periodically  audited  by  a  Chartered 
Accountant.  It  is  desirable  where  practicable  that  the  name  of  the 
accountant  selected  should  be  inserted  in  the  partnership  deed,  as  then  a 
majority  of  the  partners  cannot  change  the  auditor,  although,  of  course, 
he  can  still  be  changed  by  the  unanimous  decision  of  all  the  partners. 

(2)  The  accounts  to  be  kept  upon  a  proper  system  of  Double  Entry, 
to  be  approved  by  the  auditor. 

(3)  All  differences  or  disputes  upon  matters  of  account  to  be  referred 
to  the  auditor,  whose  decision  shall  be  binding  upon  all  parties. 

(4)  Provision  should  be  made  for  the  charging  of  interest  upon 
drawings  in  excess  of  the  prescribed  amount,  and  for  allowing  of  interest 
upon  any  excess  of  the  authorized  drawings  over  the  actual  amount 
withdrawn. 

(5)  On  the  death  or  retirement  of  a  partner  it  is  necessary,  under  the 
general  law,  to  take  stock  and  to  balance  the  books  in  order  to  ascertain 
the  respective  positions  of  the  partners.  To  avoid  trouble  and  incon- 
venience that  this  would  cause,  it  is  generally  desirable  to  insert  a  clause 
providing  that  the  share  of  the  outgoing  partner  in  the  profits  of  the 
current  broken  period  shall  be  computed  upon  the  average  of  the  three 
preceding  years.  A  clause  to  this  effect  should,  however,  only  be  inserted 
when  the  profits  do  not  fluctuate  considerably,  as  otherwise  serious 
injustice  might  be  done  by  excluding  the  results  of  the  broken  period. 

(6)  The  exact  mode  of  paying  out  the  outgoing  partner  should  be 
provided,  and,  where  practicable,  this  amount  should  be  payable  by  instal- 
ments extending  over  such  a  period  as  not  to  seriously  cripple  the  busi- 
ness; or,  in  the  alternative,  a  policy  of  "survivorship  insurance"  should 
be  effected  at  the  cost  of  the  firm. 


PARTNERSHIP  DISSOLUTION. 

A  partnership  may  be  dissolved  for  one  of  the  following 
reasons : 

(i)  By  the  expiration  of  the  time  originally  fixed  for  the  continuation, 
or  by  the  completion  of  the  act  for  which  the  partnership  was  created. 

(2)  By  later  agreement,  annulling  the  first  agreement  by  which  the 
partnership  was  created. 

(3)  By  the  objects  of  the  partnership  becoming  illegal  or  impossible. 

(4)  By  assignment  of  a  partner's  interest  unless  it  be  with  the  con- 
sent of  all  partners.  (Partnership  being  a  personal  relation,  only  the 
parties  that  originally  entered  into  that  relation  can  continue,  but  they 
cannot  assign  any  of  their  interests  without  the  other  partners'  consent; 

(5)  By  death  of  any  one  of  the  partners. 

(6)  Other  occurrences,  while  not  dissolving  the  firm,  ipso  facto,  give 
the  right  to  certain  partners  to  dissolve,  if  they  so  desire.  Such  cases 
arc:    Insolvency  or  bankruptcy  of  one  or  more  partners,  insanity,  etc. 

In  adjusting  the  accounts  of  partners,  losses  ought  to  be  made 
good,  first,  out  of  profits  of  the  firm,  next,  out  of  the  capital 
of  the  firm,  and  finally,  by  the  partners  individually  contributing 
the  deficit  according  to  their  respective  shares. 


Partnership  Adjustments. 

The  assets  of  a  partnership  should,  at  a  dissolution,  be  applied 
as  follows: 

(i)  Firm  debts  to  outsiders. 

(2)  Advances  or  loans  made  by  partners  individually  to  the  firm. 

(3)  Settlement  of  capital. 

(4)  Ultimate  residue,  if  any,  to  be  divided  as  profit,  according  to 

the  agreement  for  sharing  profit  and  loss;  if  there  be  no 
agreement  to  this  effect,  then  equally. 


FIRST  PROBLEM  IN  PARTNERSHIP  ADJUSTMENTS. 

To  adjust  partners'  accounts  when  the  books  have  been  kept 
by  single  entry : 

X.,  Y.,  and  Z.  were  partners  in  a  trading  concern,  having 
articles  of  agreement  among  them  in  writing,  and  among  other 
clauses  there  was  a  provision  that  profits  or  losses  were  to  be 
divided,  two-fifths  to  X.,  seven-twentieths  to  Y.,  and  one-fourth 
to  Z.,  and  furthermore: 

In  the  event  of  the  death  of  one  of  the  partners  during  the  existence  of 
the  partnership  the  two  survivors  are  to  continue  the  business,  and  the 
deceased  partner's  share  is  to  be  paid  to  his  executor  or  administrator 
within  five  years  after  his  death  in  five  equal  annual  payments,  each 
unpaid  balance  to  bear  6  per  cent,  interest 

The  accounts  were  kept  by  single  entry  and  were  made  up 
quarterly,  to  March  31,  June  30,  September  30,  and  December  31, 
The  final  statements  were  signed  by  each  partner  who  thus 
acknowledged  the  correctness  of  the  statements  and  its  agree- 
ment with  the  terms  of  the  articles  of  co-partnership,  and  thereby 
that  the  profits  shown  by  the  statements  were  those  earned  during 
each  fiscal  period  mentioned. 

The  net  profits  of  the  twelve  quarters  to  December,  1907, 
were,  as  acknowledged  by  the  three  partners,  as  follows : 

To  March    31,1905 $936.50 

To  June      30,  1905 876.00 

To  Sept.     30,1905 1,150.00 

To  Dec.       31,  1905 1,032.70 

To  March    31,  1906 ^.00 

To  June      30,  1906 800.00 

To  Sept.      30,  1906 895.00 

To  Dec.       31,1906 960.00 

To  March    31,1907 1,012.00 

To  June,     30.1907 763.60 

To.  Sept.     30,  1907 945.00 

lo  Dec.      31,1907 575.00 


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Accounting  Problems  and  Solutions. 


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Partnership  Adjustments. 

In  January,  1908,  the  clause  making  provision  in  case  of  the 
death  of  one  of  the  partners  was  amended  to  read  as  follows : 

In  the  event  of  the  death  of  one  of  the  partners  during  the  existence 
of  the  partnership,  the  surviving  partners  are  to  continue  the  business,  and 
die  deceased  partner's  share  is  to  be  determined  by  the  balance  shown  to 
his  account  in  the  Ledger.  In  addition  to  this  his  share  of  goodwill  is  to 
be  taken  into  consideration,  the  latter  to  be  the  sum  of  the  net  profits  of 
the  business  for  three  years  preceding  such  partner's  death,  including  in 
such  calculation  the  broken  period.  The  deceased  partner's  share  is  to  be 
paid  out  to  his  executor  or  administrator  within  five  years  after  his 
death,  in  five  equal  annual  payments,  each  unpaid  balance  to  bear  6  per 
cent,  interest. 

X.  died  on  February  28,  and  it  is  agreed  that  the  partnership 

terminated  as  of  that  date.    The  condition  of  the  affairs  of  the 

business  on   December  31,    1907,   and   on   February  28,    1908, 

respectively,  was  as  shown  on  the  preceding  page  and  on  page  11. 

From  the  various  business  and  financial  papers  of  the  concern 
the  following  results  of  operation  are  shown  for  the  period  cover- 
ing the  last  two  months,  January — February,  1908 : 

Purchases  during  the  two  months  were  $6,986.50.  Sales  were 
on  a  basis  of  40  per  cent,  profit,  the  inventory  of  goods  on  hand 
being  $3,568.00.  The  firm  has  in  its  possession  notes  receivable 
amounting  to  $1,985.10;  it  discounted  with  the  bank  notes 
receivable  amounting  to  $1,800.00,  less  discount  $27.00.  The  out- 
standing accounts  as  per  Ledger  amount  to  $1,410.80.  Cash  pay- 
ments were  as  follows: 

Salaries    $400.00 

Rent    150.00 

X.,  for  personal  use 125.00 

Y.,  for  personal  use 75.00 

Z.,  for  personal  use 75-00 

Repayment  of  Loan  Payable 1,350.00 

Notes  Payable   600.00 

Sundry  Creditors    3,225.00 

t  •  *  •  •• 
It  was  further  ascertained  that  the  heaviest  sales  were  usually 

made  during  the  first  quarter  of  the  year. 

It  is  now  desired  to  adjust  and  determine  the  respective  Capi- 
tal Accounts  of  the  partners  as  of  date  of  February  28,  1908,  and 
the  amount  due  by  the  surviving  partners  to  the  estate  of  X.,  or 
his  legal  administrator,  payable  yearly  as  per  existing  agreement. 

SOLUTION. 

Our  first  duty  is  to  determine  and  verify  the  cash  balance,  and 
for  this  purpose  we  will  prepare  the  Statement  of  Receipts  and 

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Accounting  Problems  and  Solutions. 

Payments  for  the  last  period,  January — February,  1908,  shown  on 
page  10. 

The  next  step  is  to  find  the  profit  or  loss,  and  then  to  prepare 
the  respective  Capital  Accounts  of  the  partners. 

A  good  rule  for  finding  the  profit  or  loss  of  a  concern  for  a 
given  period  from  books  kept  by  the  single  entry  method,  as  sug- 
gested by  Lisle,  in  his  Accounting  in  Theory  and  Practice,  is  as 
follows : 

Prepare  a  Statement  of  Affairs  as  at  the  close  of  the  period,  and  so 
ascertain  the  capital  at  the  end  of  the  period.  Prepare  a  Capital  Account, 
or  Capital  Accounts,  if  the  business  is  a  partnership,  for  the  period. 
From  the  capital  brought  out  by  the  Statement  of  Affairs  deduct  the 
capital  shown  by  the  Capital  Account  or  the  Capital  Accounts  prepared. 
The  difference  is  the  net  profit  for  the  period.  If  the  capital  shown  by 
the  Capital  Accounts  is  greater  than  the  capital  shown  by  the  Statement 
of  Affairs,  the  result  of  the  period's  transactions  is  a  loss. 

The  profit  or  loss  for  the  period  under  review  could  also  be 
ascertained  by  a  comparison  of  the  Statement  of  Affairs  of  one 
period  (December  31,  1907,)  with  that  of  the  other  period  (Feb- 
ruary 28,  1908).  If  the  former  capital  is  greater  than  the  latter, 
the  difference  would  be  a  loss  for  the  period,  otherwise  a  gain. 

If  we  proceed  in  accordance  with  the  first  rule  (Lisle*s),  we 
would  prepare  the  Statement  of  Affairs,  as  (at  that  date,  February 
28,  1908,  as  shown  on  the  preceding  page. 

We  can  now  make  up  the  following : 


RECAPITULATION. 

Capital  of  the  firm  at  the  close  of  the  period 

Less — 

Credit    balance    shown    on    the    partners' 
accounts,  viz. : 

X $1,589.00 

Y 1,425.00 

Z 996.00 


$5,460.40 


$4,010.00 


Leaving  as  profit  for  the  period  Jan.-Feb.,  1908. .        $1,450.40 

According  to  the  original  agreement  in  regard  to  the  division 
of  profits  or  losses, 

X.  would  be  entitled  to  2/5  of  $1,450.40  =  $580.16 
Y.  would  be  entitled  to  7/20  of  $1,450.40  =  50764 
Z.  would  be  entitled  to   54  of  $1,450.40  =    362.60 

Crediting  the  Partners'  Capital  Accounts  with  their  rcspecir 
ive  shares  of  profits,  these  will  appear  as  shown  on  the  following 

page. 


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Partnership  Adjustments. 

We  know  now  what  the  Capital  Accounts  of  the  respective 
partners  amount  to.  Adhering  to  the  amended  provision  in  regard 
to  goodwill  in  case  of  death  we  must  first  of  all  determine  the  net 
profits  for  three  years  preceding  the  partner's  death,  including 
in  such  calculation  the  broken  period. 

For  this  purpose  we  add  the  net  profits  for  eleven  periods 
from  June,  1905,  to  and  including  December,  1907.  As  this 
addition  does  not  give  us  the  full  three  years,  and  as  we  have 
furthermore  also  to  consider  the  broken  period,  we  are  to  find 
the  approximate  net  profit  for  one  month,  i.  e.  the  month  which 
the  last  quarter  lacks.  According  to  the  information  given,  this 
quarter  (January—March)  contains  the  heaviest  sales;  hence  we 
must,  in  this  instance  at  least,  in  an  indirect  way  find  this  sum. 
We  proceed  to  do  this  as  follows : 

We  add  to  the  net  profits  of  the  last  period  (January— Feb- 
ruary) all  the  first  quarters  (January — March),  viz.: 

March,    1905 $936.50 

March,    1906 98000 

March.    1907... .**.;;;  1,012.00 

Last  period    (Jan.-Feb.) 1,450.40 

Making  a  total  of $4,378.90 

This  we  divide  by  the  number  of  months  comprising  these  sums 
of  net  profits,  i.  e.,  eleven,  and  so  arrive,  approximately,  at  the 
probable  March  profits.  Adding  this  sum  so  derived  to  the  profits 
of  the  last  (January— February)  period  we  get  the  net  profits 
for  the  last  (twelfth)  quarter.  This  added  to  the  eleven  quarters 
gives  us  a  total  of  $11,837.78,  which  sum  represents  the  value  of 
the  goodwill,  of  which  sum  X.  is  entitled  to  two-fifths.  X.'s 
Capital  Account  will  now  appear  as  shown  on  the  preceding  page. 
On  our  books  we  now  have  an  additional  account,  thus : 

J?o8  GOODWILL. 

March  i,  To  2/5  of  total 
value  paid  to  X's  Ad- 
ministrator as  per 
agreement $4,735.11 

The  other  Capital  Accounts  ( Y.'s  and  Z.'s)  remain  unchanged. 

There  are  some  accountants  who  in  such  cases  prefer  placing 
the  entire  value  of  the  goodwill  on  the  books  of  the  concern,  and 
to  credit  the  Capital  Accounts  of  the  partners  with  their  respect- 
ive shares.    This  procedure  is  not  only  unscientific,  but  illog  'cal. 

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Then  is  it  fair  construction  of  these  articles  to  assume  that  in  taking  the 
annual  accounts  of  the  profits  of  the  concern,  the  partners  were  going  to 
put  a  value  upon  the  Goodwill,  so  as  to  allow  each  partner  to  take  year 
by  year  out  of  the  partnership  the  amount  of  his  share  of  the  increase  in 
the  value  of  the  goodwill?  Now  one  cannot  help  feeling  that  no  mer- 
cantile man  ever  dreamt  of  such  a  thing.  The  goodwill  is  not  an  avail- 
able asset  in  the  sense  that  you  can  draw  upon  it,  or  that  you  can  turn  it 
into  money,  or  pay  it  out  to  the  partners,  and  I  should  say  with  some 
confidence,  not  only  relying  upon  my  own  experience,  but  having  appealed 
to  the  bar  in  this  case,  that  no  one  ever  saw  such  a  thing  in  a  merchant's 
accounts. 

Having  arrived  at  the  total  to  which  X.'s  administrator  is 
entitled,  we  desire  to  find  the  sum  due  this  representative  yearly. 
In  doing  this  we  must  take  into  consideration  that  each  unpaid 
balance  is  to  bear  6  per  cent,  interest.  This  will  be  best  shown  by 
a  continuation  of  X.'s  Capital  Account,  but  changed  from  pro- 
prietorship to  that  of  one  representing  a  true  liability  of  the  firm 
of  Y.  and  Z.,  as  shown  on  the  preceding  page. 

If  the  surviving  partners  should  on  February  28,  1908,  decide 
to  deal  with  the  period's  transactions  on  the  double  entry  prin- 
ciple, and  in  consequence  thereof  furnish  the  administrator  with 
a  Profit  and  Loss  Account  and  a  Balance  Sheet,  it  would  be 
desirable  to  express  such  a  change  in  the  books  of  the  concern. 

We  have  then  to  take  into  consideration  all  the  facts  that 
occurred  during  the  period  from  December  31,  1907,  to  and 
including  February  28,  1908.  The  procedure  in  such  a  case 
would  be  as  follows : 

Incorporate  by  means  of  journal  entries  the  facts  disclosed  by 
the  Statement  of  Assets  and  Liabilities  and  which  are  not  con- 
tained in  the  ledger.  Journalize  the  subsequent  transactions 
(there  being  no  necessity,  for  our  purpose  at  least,  to  make  the 
various  entries) ;  raise  the  necessary  ledger  accounts,  and  make 
closing  entries  for  the  various  nominal  accounts ;  prepare  a  Profit 
and  Loss  Account,  and  the  Balance  Sheet. 

If  the  firm  followed  this  method  the  Profit  &  Loss  Account 
and  the  Balance  Sheet  would  appear  as  follows : 


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Accounting  Problems  and  Solutions. 

To  adjust  partners*  accounts  when  the  books  have  been  kept 
by  double  entry: 

Mr.  Whatley  in  his  Accountants*  and  Bookkeeper/  Vade- 
Mecum  states  that  frequently  in  a  final  adjustment  of  the  accounts 
the  assets  are  insufficient  to  meet  the  liabilities  as  well  as  claims 
of  the  partners  themselves,  and  in  consequence  the  position  of 
affairs  will  be  one  of  the  following: 

(i)  Either  the  assets  realized  are  not  sufficient  to  pay  the  debts  and 
liabilities  of  the  firm  in  full; 

(2)  Or  the  assets  realized  are  sufficient  to  liquidate  the  claims  of 
creditors,  but  insufficient  to  repay  the  advances  of  partners ; 

(3)  Or  the  assets  are  sufficient  to  pay  the  debts  and  liabilities  of  the 
firm  and  the  advances  of  the  partners,  but  insufficient  to  repay  each 
partner  his  respective  capital. 

Accordingly  Mr.  Whatley  proceeds  to  work  out  various  prob- 
lems showing  how  the  adjustment  should  be  made  in  any  one  of 
the  three  possible  cases,  and  adds: 

There  is  no  need  here  to  take  into  consideration  a  case  where  the 
assets  realize  their  full  value,  for  the  accounts  would  be  closed  in  their 
natural  order  without  any  difficulty. 

This,  however,  is  not  always  the  case.  On  the  contrary,  when 
accounts  are  adjusted  at  a  dissolution,  unless  insolvent,  (because 
then  the  partners  have  no  benefit  in  view  over  which  to  raise 
trouble)  there  will  always  spring  up  a  number  of  points  over 
which  disagreement  will  arise  in  adjusting  the  final  affairs.  One 
partner  may  claim  that  he  understood  this  clause  in  one  way  while 
the  other  will  claim  a  different  construction.  We  will,  then,  take 
in  addition  to  the  cases  mentioned  the  following 

SECOND  PROBLEM  IN  PARTNERSHIP 
ADJUSTMENTS. 

The  assets  to  have  realized  their  full  value,  but  the  retiring 
partner  to  be  entitled  to  goodwill,  as  stated  in  their  articles  of 
co-partnership. 

A.,  B.,  C.  and  D.  arranged  on  January  i,  1905,  to  become  part- 
ners in  a  manufacturing  enterprise  for  a  period  of  five  years. 
They  signed  Articles  of  Co-Partnership,  the  latter  containing 
among  the  ordinary  clauses  incidental  to  a  partnership  the  follow- 
ing essentials : 


Partnership  Adjustments. 

A.,  B.,  and  C.  are  each  to  contribute  $5,000,  while  D.  is  to  bring  in  the 
sum  of  $10,000,  the  combined  capital  of  the  partnership  to  be  $25,000. 

Interest  at  the  rate  of  6  per  cent,  to  be  allowed  to  any  partner  whose 
investment  may  exceed  the  sum  which  he  is  required  to  bring  in  into  the 
business.  On  the  other  hand  interest  at  the  same  rate  is  to  be  charged 
to  any  partner  whose  investment  is  below  the  required  sum.  In  either 
case  these  respective  debits  or  credits  are  to  be  carried  through  the  Profit 
and  Loss  Account  and  adjusted  to  the  partners'  accounts  according  to 
their  agreement  as  regards  the  division  of  profits  or  losses. 

Each  partner  is  allowed  to  draw  the  sum  of  $100  per  month,  which 
sum  so  drawn  is  to  constitute  a  charge  to  the  Salaries  Account.  This 
account  is  to  be  finally  charged  up  as  a  loss. 

The  profits  or  losses  of  the  business  are  to  be  divided  in  proportion  to 
each  partner's  capital  and  the  time  such  capital  was  employed  in  the 
business. 

It  is  the  right  of  each  and  every  partner  to  ask  for  a  dissolution  of  co- 
partnership at  the  expiration  of  three  years  from  date  hereof,  provided 
he  gives  reasonable  notice  of  such  intention  to  his  associates. 

If  any  member  of  the  firm  desires  to  take  advantage  of  the  last  men- 
tioned clause,  he  is  entitled,  in  addition  to  the  net  balance  shown  to  his 
account  in  the  ledger,  to  a  quarter  of  the  Goodwill  of  the  business,  the 
latter  to  be  based  on  the  last  year's  net  profits,  and  to  be  one  and  one-half 
times  that  sum. 

If  a  partner  retires,  the  remaining  partners  are  not  obliged  to  pay  him 
in  cash  more  than  two-thirds  of  his  capital.  They  may  pay  the  balance  by 
giving  a  promissory  note,  which  shall  not  run  for  more  than  six  months. 


The  firm  of  A.,  B.,  C.  and  D.  continues  in  business  to  Decem- 
ber 31,  1907,  when  D.  expresses  his  desire  to  retire.  The  other 
partners  having  no  objection,  an  accountant  is  called  in  to  adjust 
the  affairs  of  the  concern  and  to  prepare  the  proper  financial  and 
business  statements,  as  well  as  the  respective  Capital  Accounts. 
Upon  examination  the  following  facts  are  discovered: 

While  the  books  have  been  kept  on  the  double  entry  principle, 
the  nominal  accounts  have  never  been  closed,  no  Profit  and  Loss 
Statements  were  ever  prepared,  and  in  some  instances  errors  were 
nade  in  charging  improperly  items  to  Expense  which  should 
have  been  charged  to  Plant  and  Machinery. 

Upon  consultation  with  the  members  of  the  firm,  the  latter 
instruct  the  accountant  to  prepare  yearly  statements  of  their 
respective  standing  for  the  period  of  their  partnership  (three 
years)  and  then  to  adjust  the  accounts  as  per  existing  agreement,. 


21 


Accounting  Problems  and  Solutions, 

subject  to  the  following  changes  concurred  in  by  all  members  of 
the  concern : 

A  reserve  is  to  be  created  for  bad  debts,  $200.00  per  year ;  a 
reserve  is  also  to  be  created  of  $200.00  per  year  for  depreciation ; 
the  clause  relating  to  interest  charges  or  allowances  is  to  be 
ignored  entirely  as  the  members  believe  that  each  partner  has 
maintained  his  required  investment. 

The  affairs  of  the  concern  as  disclosed  by  the  books  and  infor- 
mation are  as  follows: 

Purchases  of  raw  material  during  the  year  1905  were 
$29,500.00.  Of  this  sum  $200.00  has  been  returned.  Sales  dur- 
ing the  same  period  were  $57,300.00,  of  which  $400.00  were  re- 
turned. Labor  expenses  were  $11,200.00;  rent  of  factory 
$1,000.00.  Other  incidentals  in  the  manufacture  were  $200.00. 
The  inventory  of  raw  materials  was  $9,600.00.  $1,600.00  was 
paid  in  commissions,  and  $450.00  in  sundry  trade  expenses.  Rent 
for  office  and  salesroom  was  $600.00.  Salaries  were  $6,800.00. 
Repairs  and  renewals  to  plant  and  machinery  were  $275.00.  The 
firm  borrowed  of  the  bank  $5,000.00,  on  which  there  was  a  dis- 
count of  $150.00.  General  expenses,  such  as  stationery,  printing, 
etc.,  were  $455.00.  The  partners'  accounts  disclose  the  follow- 
ing state  of  affairs: 

A.'S  INVESTMENTS. 
1905. 

January  i $3,000.00 

March    i 1,000.00 

April    I ••  •     1.000.00 

October  i 1,000.00 

A.'S  WITHDRAWALS. 
1905. 
February    i $500.00 

July    1 500.00 

B.'S  INVESTMENTS. 
1905. 

January  i $5,000.00 

July    1 2,000.00 

,  B.'S  WITHDRAWALS. 

1905- 
April    I $1,500.00 

August  1 500.00 

22 


Partnership  Adjustments. 

C'S  INVESTMENTS. 

1905. 

January  i $2,000.00 

March    i 2,000.00 

June  1 1,000.00 

September  i 1,000.00 

October  i 500.00 

C'S  WITHDRAWALS. 
1905. 

February   i $200.00 

April  1 1,000.00 

July  1 500.00 

D.'S  INVESTMENTS. 

1905. 
January  i $8,000.00 

April   1 2,000.00 

July    I 1,000.00 

September  i 500.00 

D.'S  WITHDRAWALS. 

1905. 
March    i $1,500.00 

June   1 500.00 

August   1 1,000.00 


I 


I 


ii . 


These  withdrawals  do  not  include  salaries  to  which  the  part- 
ners were  entitled ;  these  were  paid  monthly  and  charged  through 
the  Salary  Account. 

In  1906  conditions  were  as  follows: 

Purchases,  $21,700.00.  Sales,  $61,300.00.  Inventory  of  raw 
materials  on  hand  at  the  end  of  the  year,  $3,700.00.  Inventory 
of  finished  goods,  $1,200.00.  Labor  and  wages,  $15,400.00. 
Sundry  factory  expenses,  $3,100.00.  Selling  expenses,  $3,200.00. 
Salaries,  $7,200.00.  General  office  expenses,  $450.00.  An  item  of 
$200.00  which  properly  should  have  been  charged  to  the  Plant 
and  Machinery  Account  was  incorrectly  debited  to  Selling  Ex- 
penses. Interest  and  discount  on  loans  amounted  to  $150.00. 
Partners'  Accounts  remained  unchanged  excepting  that  the  profits 
were  not  actually  withdrawn.  These  had  never  been  determined 
and  no  nominal  accounts  had  been  closed. 


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'34 


1 


Partnership  Adjustments. 

The  state  of  affairs  in  1907  was  as  follows  : 

Purchases,  $26,800.00.  Sales,  $58,500.00.  Inventory  of  raw 
materials  on  hand,  $5,200.00.  Factory  expenses  were  $16,900.00, 
inclusive  of  labor,  rent,  etc.    Selling  expenses  were : 

Advertising    $6oo.cx) 

Rent   of   salesroom 500.00 

Commissions    1,500.00 

Freight  and  cartage 200.00 

General  salaries  were  $7,100.00.  General  expenses,  $400.00. 
Partners'  Account  were  as  follows : 

1907 

June  I,  D.  withdrew $4,000.00 

October  i,  he  reinvested 2,000.00 

March  i,  B.  withdrew 1,500.00 

March  i,  A.  withdrew 1,500.00 

August  I,  he  reinvested 1,000.00 

The  condition  of  Assets  and  Liabilities  on  December  31,  1907, 
as  disclosed  by  the  books  and  various  data,  was  as  follows : 

ASSETS. 

Plant   and   machinery $3,700 

Real  estate 8,000 

Cash  on  hand  and  in  bank 11,570 

Bills  Receivable 20,000 

Accounts  receivable  37,ioo 

Horses,  harness  and  wagons 1,200 

Investments  5,000 

Patents  and  patterns  i[6oo 

LIABILITIES. 

Bills  payable  $20,500 

Accounts  payable   27,500 

It  is  required  to  adjust  the  Partners'  Capital  Accounts  and 
to  find  the  amount  due  by  the  remaining  partners  to  the  retiring 
one. 

SOLUTION. 

As  a  Profit  and  Loss  Account  had  never  been  prepared  during 
the  existence  of  the  partnership,  our  first  step  must  be  that  of 
preparing  a  Profit  and  Loss  Account  for  the  respective  years  of 
the  partnership,  and  to  take  into  consideration  the  various  points 
covered  by  the  agreement,  not  forgetting  the  amendments  made 
with  the  consent  of  all. 

Accordingly  we  prepare  the  Profit  and  Loss  Account  shown 
on  the  preceding  page. 

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Partnership  Adjustments, 

Having  ascertained  the  net  profit  for  this  year  (1905)  wc 
have  to  allocate  the  same  in  accordance  with  the  partnership  pro- 
vision as  well  as  in  accordance  with  the  amended  clause. 

This  clause,  it  will  be  recalled,  provided  for  a  yearly  reserve 
of  $200.00  against  bad  debts,  while  the  agreement  proper  called 
for  the  adjustment  of  the  net  profits  according  to  the  capital 
invested  and  the  time  that  such  capital  had  been  used  in  the 
business. 

Lisle  in  his  Accounting  in  Theory  and  Practice  gives  the  fol- 
lowing rule  in  regard  to  such  adjustment : 

To  divide  the  profits  of  a  co-partnery  according  to  the  amount  of  each 
partner's  capital  and  the  time  it  has  been  in  the  business,  multiply  the 
sums  on  the  credit  side  of  each  partner's  account  by  the  portion  of  time 
from  the  date  of  payment  to  the  close  of  the  account,  and  deduct  from  the 
sum  of  these  products  the  sum  of  the  products  of  the  debit  side  formed 
in  the  same  way.  This  will  give  the  products  (net)  for  each  partner,  and 
the  profit  to  be  allocated  should  be  divided  according  to  these  products. 

Following  this  rule  we  have  the  result  shown  on  the  preced- 
ing page. 

Hence, 

40, coo  „       c6,ooo^, 

-^^ — Xi4.o7o=2,827.7i;  -^ Xi4.o7o=3.i9902; 

246,300  240,300 

42,300,,           ,      98.500^,         ^  >-  o 
"^  X  14,070=2,416.42;  J^  ;; X  14.070^^5.626.85 


246,300 


246,300 


making  the  respective  shares  as  follows : 

A $2,827,71 

B 3»i9902 

C 2,416.42 

D 5,626.85 

We  are  now  prepared  to  arrange  the  Profit  and  Loss  Appro- 
priation Account  for  1905  as  shown  on  page  28. 

We  proceed  then  to  determine  the  results  of  the  operation  for 
the  next  year  (1906)  and  prepare  the  Profit  and  Loss  Account 
for  1906  as  shown  on  page  29. 

27 


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Partnership  Adjustments, 

Observing  the  same  method  for  the  present  (1906)  year,  we 
add  to  the  previous  balances  (shown  in  1905  to  the  Capital 
Accounts)  the  profits  allocated  to  each  partner's  account,  and  we 
find  the  following  results : 


A.  is  entitled  to $1,089.22 

B.  is  entitled  to 1,140.89 

C.  is  entitled  to 1,004,16 

D.  is  entitled  to 1,96573 


of  the  total  net  profits,  available  for  allocation  among  the  part- 
ners as  per  agreement.  We  prepare  then  the  Profit  and  Loss 
Appropriation  Account  for  1906  on  page  28. 

The  next  step  in  our  solution  is  to  determine  the  result  of  the 
operation  of  the  year  1907.  Following  the  former  routine  we 
prepare  the  Profit  and  Loss  Accotmt  for  1907  shown  on  page  30. 

In  accordance  with  our  adopted  rule  we  take  into  considera- 
tion the  various  shiftings  that  take  place  with  regard  to  capital, 
and  arrive  at  the  following  results : 

A.  is  entitled  to $1,171.13 

B.  is  entitled  to 1,172.05 

C.  is  entitled  to 1,190.98 

D.  is  entitled  to 2,065.84 

of  the  total  amount  of  the  net  profits  available  for  allocation.  We 
have  then  the  Profit  and  Loss  Appropriation  Account  for  1907 
as  shown  on  page  28. 

From  the  data  given  we  are  able  to  verify  these  results  by  pre- 
paring a  financial  statement,  which  will  show  the  Balance  Sheet 
and  Partners'  Capital  Accounts  (page  32  to  36,  inclusive). 

In  accordance  with  the  provision  in  regard  to  goodwill,  we 
would  make  the  following  journal  entry: 

Goodwill  Dr $2,100 

For  one-quarter  of  the  total  value,  credited 
to  D.'s  account  as  per  agreement. 

To  D.,  Or $2,100 

For  his  share  in  the  total  value  of  good  will,  based, 
per  agreement,  at  one  and  one-half  times  the  sum 
of  last  year's  ( 1907)  net  profits. 

31 


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Accounting  Problems  and  Solutions. 


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which  entry  when  posted  will  show  the  retiring  partner's  account 
as  follows: 

D.'S  CAPITAL  ACCOUNT. 

1908. 
January  i.  By  Balance.  $16,158.42 
January  i,  By  %  share 
of   total   valuation   of 
goodwill  2,100.00 

The  retiring  partner  is  therefore  entitled  to  the  sum  of 
$18,258.42,  to  be  paid  in  accordance  with  the  agreement. 

There  is  no  necessity  for  proceeding,  as  Mr.  Whatley  states, 
to  work  out  the  various  possible  cases  (page  20),  for  the  simple 
reason  that  in  any  of  the  mentioned  instances  there  is  a  deficiency. 
A  deficiency  of  capital  should,  and  must,  be  treated  as  a  loss, 
which  is  to  be  borne  according  to  the  provision  the  partners  have 
made  with  regard  to  sharing  profits  or  losses. 

Let  us  assume  that,  for  the  purpose  of  dissolution,  an 
appraisal  and  revaluation  of  all  affairs  is  made,  and  assume  that 
the  liabilities  remain  unchanged,  but  the  actual  realizable  value 
of  the  assets  (after  taking  into  consideration  the  reserves)  is  as 
follows : 

Cash  $6,570.00 

Investments    1,000.00 

Bills  receivable  16,000.00 

Accounts  receivable 18,500.00 

Inventory    2,200.00 

Horses,  harness,  etc 800.00 

Patents  and  patterns 600.00 

Plant  and  machinery 900.00 


$46,570.00 


As  our  former  balance  sheet  showed  a  total  of  assets  amount- 
ing to  $92,170.00,  we  have  a  deficiency  of  capital  to  the  extent  of 
$45,600.00,  which  deficiency  is  to  be  adjusted  among  the  partners 
according  to  the  original  provision  of  dividing  profits  or  losses 
in  proportion  to  the  capital  invested,  and  according  to  the  time 
such  capital  has  been  employed  in  the  business. 

Suppose  that  the  firm  dissolves,  and  sells  the  assets  as  per 
valuation,  entailing  a  cost  on  the  realization  of  $500.00,  we  would 
then  prepare  a  Realization  and  Liquidation  Account  and  Partners' 
Capital  Accounts  as  shown  on  pages  38  and  39  respectively. 


37 


Accounting  Problems  and  Solutions. 


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30 


Accounting  Problems  and  Solutions. 

This  state  of  affairs,  showing  a  sudden  shrinkage,  is,  of  course, 
rather  strained,  but  for  the  purpose  of  illustrating  the  adjustment 
of  Partners'  Accounts  under  such  conditions  it  is  permissible. 
We  will  then  adjust  this  shrinkage  in  proportion  to  the  last  bal- 
ance on  each  partner's  account. 

The  total  capital,  as  per  balance  sheet,  was  $44,170.00,  while 
the  total  deficiency  was  $46,100.00,  hence  the  loss  per  cent,  is 
104.3609. 

The  respective  Capital  Accounts  will  accordingly  appear  as 
given  on  the  preceding  pages,  showing  the  amount  each  partner  is 
to  contribute  to  make  up  the  total  insolvency  of  $1,930.00. 

This  treatise  may  not  be  exhaustive  enough  to  enable  an 
accountant  to  find  in  it  material  covering  every  detail  that  may 
arise  in  adjusting  partnership  accounts ;  yet  the  writer  will  have 
attained  his  end  if  it  serves  the  practitioner  as  a  general  guide 
for  this  class  of  accounts  in  the  cases  that  are  of  more  frequent 
occurrence. 

BIBLIOGRAPHY. 

Partnership  Accounts,  by  Child. 

Bookkeeping  Exercises,  by  Dicksee. 

Accountant's  Compendium,  by  Dawson. 

Philosophy  of  Accounts,  by  Sprague. 

Accounting  and  Banking,  by  Nixon. 

Accountant's  and  Bookkeeper's  Vade-Mecum,  by  Whatley. 

Partnership,  by  Hardcastle. 

English  Statutes, 

American  Statutes. 

New  York  Statutes. 

Partnership  and  Companies,  by  Lindley. 

Partnership  Law,  by  Parsons. 

Corporation  Accounting  and  Auditing,  by  Keister. 

Accounting  in  Theory  and  Practice,  by  Lisle. 

Advanced  Accounting,  by  Dicksee. 

Auditing  (American  Edition),  by  Dicksee. 

Various  C.  P.  A.  Problems. 

The  Accountanfs  Journal  (English). 

The  Journal  of  Accountancy. 

The  Accountanfs  Manual  (English). 

The  Accountanfs  Manual  (American). 

40 


I 


PART  II, 


HI 


i 


Question  1. 
(New  York  Examination,  December,  1898.) 

The  trial  balance  of  a  manufacturing  firm  taken  January  i,  1897,  is  as 
follows : 


Capital   A    

B    

Plant  and  machinery  

Purchases    , 

Sales    

Stock  on  hand  January  i,  1896 

Labor    , 

Salaries    

Traveling   expenses    

Interest   

Stationery  and  printing   

Rents  and  taxes   

Discounts  and  allowances   

Fuel   

Insurance  (one  year  from  July  i,  1896) 

Freight    

General   expenses    

Bank  overdraft    

Creditors    

Accounts  receivable   

Rent  of  steam  power  

Cash  on  hand  

Loan  account   


$35,000 
38,000 

15,000 

24,000 

6,000 

2,500 

600 
1,200 
3,500 
1,250 
3,000 
1,150 
1,500 

600 


25,000 

200 

7,000 


$40,000 
20,000 


OSfiOO 


5,000 
4,000 

1,500 


$165,500       $165,500 


Stock  on  hand  January  i,  1897,  $23,000;  each  partner  to  be  credited 
6%  on  his  capital  for  one  year  before  profits  are  ascertained;  3%  to  be 
written  off  book  debts  for  discount;  10%  to  be  written  off  machinery  and 
plant  for  depreciation;  unexpired  insurance  to  be  taken  into  account;  net 
profit  to  be  divided  2-3  to  A  and  1-3  to  B.  Draft  journal  entries  for 
closing  the  books  and  prepare  final  balance  sheet  and  profit  and  loss 
account. 

43 


! 


Accounting  Problems  and  Solutions. 

Solution. 


Manufacturing  Account    

To  Inventory  (January  i,  1896) 

Purchases  of  raw  materials  

Freight    ( inward)    

Labor   (productive)    

Depreciation  on  plant  and  machinery. . 

Rents  and  taxes  of  factory 

Fuel    

Insurance  (six  months  only)    

To  close  the  respective  accounts. 

Rent  of  steam  power   

To  Manufacturing  Account   

To  close  the  former  account. 

Inventory   

Trading  account  (cost  of  goods  sold)   

To  Manufacturing  Account   

To  close  the  latter  account. 

Sales  Account 

To  Trading  Account  

Transfer  of  former  account. 

Trading   Account    

To  Reserve  for  discount  on  b/d  

Discounts  and  allowances  

Traveling  expenses   

Profit  and  loss  account  (bal.) 

To  close  debit  account  and  the  sec- 
ond and  third  of  the  credit  items 

Interest    Account    

To  Capital  A 

If  -D 

6%  interest  on  capital  invested  viz: 
A.  $40,000;  B.  $20,000. 

Profit  and  loss  account  

To   Salaries  

Interest    

Stationery  and  printing  

General  expenses   

Capital  A.  2/3  of  net  profits 

"       B.  1/3  "    "        "       


44 


$89,075 


$1,500 


$23,000 
64,575 


$95,000 


$30,425 


$3,600 


$25,925 


$15,000 
38,000 
1,500 
24,000 
3,500 
3,500 
3,000 

575 


$1,500 


$87,575 


$95,000 


$750 

1,250 

2,500 

25,925 


$2,400 
1,200 


$6,000 

4,200 

1,200 

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Accounting  Problems  and  Solutions, 

Solution. 
(First  Form.) 


Assets: 


Real  estate 

Plant  and  machinery 

Horses  and  wagons 

Inventory 

Accounts  receivable 

Agency  investments 

Cash  in  bank 

Net  increase  of  assets 


Increase 


$2,000.00 

16,000.00 
15,000.00 

$33,000.00 


Decrease 


Liabilities: 


Accounts  payable 

Notes  payable 

Mortgage 

Net  decrease  of  liabilities 


Decrease 


$30,000.00 


$30,000.00 


$8,500.00 
2,250.00 

2,000.00 

850.00 

$13,600.00 
19,400.00 

$33,000.00 
Increase 


$1,000.00 

25,000.00 

$26,000.00 
4,000.00 

$30,000.00 


The  profits  earned,  amounting  to  $23,400,  are  accounted  for  as 
foUows: 

Increase  of  Assets $19,400.00 

Decrease  of  Liabilities 4,000.00 


$23,400.00 


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Accounting  Problems  and  Solutions, 

Question  3 

(New  York  Elxaminadon,  December,   1898.) 

A.,  6.,  and  C  agree  to  start  in  business  with  a  capital  of  $400,000,  of 
which  A.  is  to  furnish  $200,000,  B.  $100,000,  and  C.  $100,000.  A.  is  to 
have  %  interest  in  the  business,  and  B.  and  C  each  %  interest,  and  in- 
terest at  the  rate  of  5  per  cent,  per  annum  is  to  be  paid  on  excess  capital, 
if  any.    A.  contributes  $200,000,  B.  $go,ooo,  and  C.  $80,000. 

How  would  the  capital  accounts  stand  on  the  books  after  adjusting 
the  interest  account  at  the  end  of  the  year? 

Solution. 

To  successfully  solve  this  problem  one  must  have  a  definite  idea  of 
what  the  deed  of  copartnership  contemplates  as  to  the  division  of  the 
5  per  cent,  interest  on  capital.  Where  interest  is  to  be  allowed  on  the 
excess  and  charged  on  the  deficiency  of  the  capital  of  each  partner 
beyond  or  under  a  certain  fixed  ratio,  the  interest  should  be  calculated 
on  each  partner's  account,  and  the  sum  of  this  interest  is  the  total  in- 
terest on  the  capital.  The  proportion  of  each  partner  may  be  thus  ascer- 
tained. If  the  actual  interest  on  any  partner's  account  exceeds  the 
amount  brought  out  by  this  proportion,  he  should  be  credited  with  the 
difference;  but  if,  on  the  other  hand,  the  actual  interest  is  less  than 
brought  out  by  the  proportion,  his  account  should  be  debited  with  the 
difference. 

To  illustrate: 

A.*t  Capital  Account. 

year's  interest 

at  5  per  cent. 

Jan.  I.  Capital $10,000 


Profit  and  Loss 


Interest 


faoo.ooo 


B.'s  Capital  Acco\mt. 


Profit  and 


Interest  fias.oo' 

C's  Capital  Accotmt. 


Jan.  I.  Capital 


X  year's  interest 
at  5  per  cent. 


$4,500         90,000 


Profit  and  Loss 


I  year's  interest 
at  5  per  cent. 

Jan.  X.  Capital $4,000         80,000 

Interest  $625.00 

The  interest  on  the  capital  of  the  firm  is  A.,  $10,000,  B.,  $4,500,  C, 
$4,000;  total  $18,500,  of  which  A.  is  entitled  to  ^---$9>250,  B.  K— $4*625, 
C  $4,625. 

Profit  and  Loss  Appropriation  Accoijnt. 


A.'s  Capital  Account  for  interest: 

Interest  on  his  ac- 
count for  the  year   $10,000 

Deduct   proportion 
of  $18,500  being  i 
of  total  interest  ..       9.350 


I750 


$750 


B.,  Capital  Account  for  interest: 
Proportion  of  $18,500 

being    i   of   total 

interest $4,615 

Deduct    interest   on 

his    accoimt     for 

year. 4.500 

C.  Capital  Account  for  interset: 
Proportion  of  $18,- 

500.    being    i    of 

total  interest $4,6a5 

Deduct    interest   on 

his     account     for 

year. 4,000 


$IS5 


Practical  Accounting  Problems. 

This  method  holds  good  when  the  division  of  profits  and  the  capital 
invested  have  the  same  ratio. 

The  result  is  the  same  as  that  of  the  regular  method. 


Loss  and  Gain. 


A.  ^  of  profits. 

B.  t  of  profits. 

C.  t  of  profits. 


750 
375 
375 


$1,500 


B.'s  Capital  Account: 
5%  on  $100,000  .... 
Deduct    5%    on   his 
account  $90jOoo.  . 

.'s  Capital  Account: 
5%  on  $100,000  .... 
Deduct   5%    on   his 

account  $80,000.  . 


$5,000 
4. 500 

$S.ooo 
4,000 


$500 


1,000 
$1,500 


%l 


Accounting  Problems  and  Solutions. 

Question  4. 
(New  York  Examination,  June.  1900.) 

The  following  trial  balance  is  handed  you,  with  the  request  that  you 
prepare  a  revenue  account  and  a  balance-sheet : 

A,  B's  capital    $20,000.00 

A,  B's  personal  account  $1,000.00 

Bank  of  North  America  600.00 

Cash  in  hand   90.00- 

Merchandise   account   8,600.00 

Repair  account 87.50 

Bills  receivable  6,400.00 

Bills  payable   4.000.00 

Real   estate    i,350.oo 

Bank  stock    1,566.00 

General   expenses    1,860.00 

Freight    1,000.00 

Accounts   receivable    8,000.00 

Accounts   payable    io,oos.oo 

Profit  and  loss 3>446.SO     

$34,000.00       $34,000.00 
If  all  the  information  required  is  not  presented  in  this  trial  balance, 
supply  what  is  wanting  and  submit  the  statements  called  for. 

Solution. 

Statement  of  Profits  and  Losses  of  the  firm  of  A,  B,  as  on 190. . . 

Inventory  of  Merchandise  on  hand $15,000.00 

Less  excess  of  Merchandise  debit  side 8,600.00 

Gross  Profit $6,400.00 

Losses: 

Repair  account $87.50 

General  expenses 1,860.00 

Freight 1,000.00              2,947.50 

Net  Profit  for  the  year $3.452-5o 

Deduct  debit  balance  of  P.  &  L.  Account 3,446.50 


Net  profit  for  the  period. 


$6.00 


BALANCE  SHEET  OF  THE  FIRM  OF  A,  B,  AS  ON 190 


Assets  : 

Cash $90.00 

Cash  in  Bank      600.00 


Bank  Stock 

Notes  Rec.  .$6,400.00 
Acc'ts  Rec.  .  8,000.00 


Mdse.  Inventory. 
Real  Estate 


$690.00 

1,566.00 

14,400.00 

15,000.00 
i;35o.oo 

$33,006.00 


Liabilities: 

Notes  Pay. .  $4,000.00 

Acc'ts  Pay.    10,000.00    $14,000.00 

Capital: 
Investment.  $2  0,000. 00 
Net  Profit..  6.00 


$20,006.00 


Less 

withdraw's.     1,000.00       19,006.00 


$33,006.00 


Practical  Accounting  Problems. 

Question  5. 

(New  York  Examination,  June,  1903.) 

John  Doe  died  January  15,  1901,  leaving  a  small  estate,  and  in  his  will 
made  Richard  Roe  his  executor.  The  will  provided  that  a  legacy  of  $5,000 
should  be  paid  to  Mary  Doe,  sister  of  the  testator,  and  that  the  residuary 
estate  should  go  to  the  testator's  wife  and  two  daughters,  share  and  share 
alike. 

The  estate  consisted  of  the  following: 

Cash  in  the  Dime  Savings  Bank $348.50 

One    month's    salary    (due    the   testator    from    his 

employer)   250.00 

10  Union  Pacific  R.  R.  Co's.  first  mortgage  5  per  cent. 

gold  bonds  of  $1,000  each 10,000.00 

One  first  income  bond,  Central  R.  R.  of  Georgia 1,000.00 

Demand  note  of  John  Smith 100.00 

At  his  death  the  testator  owed  two  months' 

rent   $50.00 

Acker,  Merrall  &  Condit,  household  supplies . .     81.50 
The  appraiser  appointed  by  the  Surrogate  inventoried  all  securities  and 
accounts  due  the  estate  at  their  face  value. 

The  executor  received  $348.50  from  the  Dime  Savings  Bank,  with 
$14.25  interest.  He  sold  the  Union  Pacific  bonds  at  102  and  two  months* 
interest,  the  Central  of  Georgia  income  bond  for  $875  flat,  and  paid  M.  J. 
Senior,  undertaker,  $541  for  funeral  expenses;  Arnold,  Constable  &  Co., 
$185  for  mourning  apparel  of  widow  and  children.  He  also  paid  for  legal 
and  other  expenses  incidental  to  the  probating  of  the  will,  $125.  John 
Smith  was  bankrupt,  and  his  note  proved  to  be  worthless.  The  executor 
deducted  his  commission  and  distributed  the  funds  of  the  estate  according 
to  the  terms  of  the  will. 

From  the  above  statement  of  facts  prepare  (a)  the  executor's  inventory 
of  the  estate,  (b)  the  executor's  summary  statement  and  schedule  for 
presentation  to  the  surrogate's  court  in  final  accounting,  (c)  a  statement 
of  the  account  of  commissions  to  which  the  executor  was  entitled,  (d)  a 
statement  of  the  amounts  paid  to  each  beneficiary. 

Solution. 

Statement  of  the  Inventory  of  the  executor  of  the  estate  of  John  Doe, 
who  died  January  15,  1901. 

Cash  in  Dime  Savings  Bank $348.50 

Salary  due  testator 250.00 

10  shares  Union  Pacific  R.  R.  first  5  per  cent.  Gold 

Bonds  at  $1,000 .* 10,000.00 

I  Income  Bond  Central  R.  R.  of  Ga 1,000.00 

Notes  Receivable  (John  Smith) •  100.00 

(i)  Sales:                          Schedule  A.  $11,698.50 

10  U.  P.  R.  R.  bonds  at  102 $10,200.00 

I  Income  Bond  of  C.  R.  R.  of  Ga. . . .         875.00 

(2)  Debts  collected:  $11,075.00 

Dime  Savings  Bank $348.50 

Salary  collected  250.00 

(3)  Interest  collected :  598.50 

On  deposit  in  Dime  Savings  Bank...         $14.25 
On  U.  P.  Gold  Bonds  2  months  at  5 

per  cent 83.33 


97.58 


$11,771.08 


53 


Accounting  Problems  and  Solutions. 

Schedule  B. 
Uncollected  Debts: 

Demand  note  of  John  Smith 

Uncollected  as  the  same  is  bankrupt. 

Schedule  C. 
Expenses : 

M.  J.  Senior,  for  funeral  expenses $54100 

Legal  and  probating  expenses 125.00 

Schedule  D. 

« 

Creditors'  claims : 

Acker,  Merrall  &  Condit $81.50 

Rent 50.00 


$100.00 


$666x)o 


$131.50 


Schedule  E. 
Payments  to  legatees : 

Advances  to  widow  and  daughters  by 
paying  their  bills  at  Arnold,  Con- 
stable &  Co $185.00 

Mary  Doe,  sister  of  deceased 5,000.00 

Widow  1/3  of  remainder,  in  accord- 
ance with  the  will 1^26.95 

Daughter  1/3  of  remainder,  in  accord- 
ance with  the  will 1326.96 

Daughter  1/3  of  remainder,  in  accord- 
ance with  the  will 1,826.96 


$10,665^7 


Schedule  F. 
Names  and  addresses  of  legatees  omitted,  as  they  are  not  given  in  the 
problem. 


Schedule  G. 
Richard  Doe,  executor,  for  commission. 


$30771 
$11,771.08 


54 


Practical  Accounting  Problems, 

Statement  of  Executor's  Commission. 

Inventory    $11,698.50 

Net  increase   72.58 

$11,771.08 

5  per  cent,  commission  on 

first  $1,000= $50.00 

2l4  per  cent,  commission  on 

first  $10,000= 250.00 

I  per  cent,  commission  on 

balance  $771.08= 7-7i 

$307.71 

SUMMARY  STATEMENT  OF  THE  EXECUTOR  OF  THE  ESTATE 
OF  JOHN  DOE,  WHO  DIED  JANUARY  15,  1901. 

I,  Richard  Doe,  executor,  charge  myself,  as  follows : 

With  amount  of  Inventory $11,698.50 

With  net  increase,  as  shown  by  Schedule  A 72.58 


$11,771.08 


I  credit  myself,  as  follows : 

With  expenses,  as  per  schedule  C $666.00 

With  payments  to  creditors,  as  per  schedule  D i3i-50 

With  advances  and  final  pa)rments  made  to  legatees 

in  accordance  with  the  will  as  per  schedule  E. ..  10,665.87 

With  commissions  deducted  by  myself 307-71 

$11,771.08 


STATEMENT  OF  PAYMENTS  MADE  TO  BENEFICIARIES. 

Mary  Doe,  sister  of  deceased $5,000.00 

Widow  1/3  of  the  remainder 1,888.62 

Daughter  1/3  of  the  remainder 1,888.62 

Daughter  1/3  of  the  remainder 1,888.63 

$10,665.87 

(This  problem  can  also  be  solved  by  the  Charge  and  Discharge  metho4 
as  adopted  in  many  States;  this  solution,  however,  is  in  accordance  widi 
the  requirements  of  the  Surrogates,  in  the  County  of  New  York.) 

55 


v» 


Accounting  Problems  and  Solutions. 

Question  6. 
(Illinois  Examination.  November,  1903.) 

Brown  and  Jones  begin  a  partnership  business  January  i,  1902.  At  the 
time  of  closing  the  books,  December  31,  1902,  an  examination  of  the 
accounts   revealed  the   following: 

January  i,  Brown  paid  in $9,000.00 

May  I,  "         "     " 2,400.00 

June  I,  "      drew  out 1,800.00 

September  i,    "  "        "  2,000.00 

October  i,        "      paid  in 800.00 

January  i,  Jones  paid  in 3,000.00 

March  I,         "       drew  out 1,600.00 

May   1,  "  "       "  1,200.00 

June  I,  "       paid  in 1,500.00 

October  I,      • 3.000.00 

Their  Merchandise  Account  was  Dr.  $32,000,  Cr.  $27,000.  Balance 
of  Merchandise  on  hand  per  inventory,  $10,500.  Cash  on  hand,  $4,900. 
Bills  Receivable,  $12,400.  Chas.  Green  owes  on  account  $250;  F.  Draper 
owes  $700 ;  Wm.  Clark  owes  $650 ;  F.  Hart  owes  $850.  They  owe  on  their 
notes  $i,8giD.  They  owe  A.  Reed  on  account  $240;  owe  C.  Smith  $500;  owe 
A.  Clark  $100.  Their  Profit  and  Loss  Account  shows  before  closmg, 
entries,  Dr.  $866;  Cr.  $1,520;  Expense  Account  is  debited  $2,520.  Com- 
mission Account  is  Cr.  $2,760;  Interest  is  debited  $480;  Cr.  $950.  The 
gain  or  loss  is  to  be  divided  in  proportion  to  each  partner  s  capital,  and 
in  proportion  to  the  time  it  was  invested. 

Prepare  (i)  Asset  and  Liability  Statement;  (2)  Merchandise  Account 
closed;  (3)  Profit  and  Loss  Account  closed;  (4)  each  partner's  account 
closed;  (5)  Balance  Sheet. 


Solution. 

STATEMENT  OF  ASSETS  AND  LIABILITIES  OF  THE  FIRM  OF 
BROWN  &  JONES,  DECEMBER  31,  1902. 


Assets. 

Cash  on  hand $4,900 

Bills   Receivable 12,400 

Accounts  Receivable: 

Chas.  Green $250 

F.   Draper   700 

Wm.  Clark  650 

F.  Hart  850 


Merchandise  Inventory 


$2,450 
10,500 


Liabilities. 

Notes  Payable  $1,890 

Accounts  Payable: 

A.  Reed  $240 

C.   Smith    500 

A.  Dark  100 

$840 

Notes      Receivable      Dis-      v'^*" 
counted   7,556 


MERCHANDISE  ACCOUNT. 


Dt. 


. .  To  Purchases, 

etc $32,000.00 

Dec.  31,  To  Profit  and 

Loss 5,500.00 

$37,500.00 


Or. 

By  Sales,  etc..  $27,000.00 

Dec.  3 1 ,  By  Inventory    10,500.00 


$37,500.00 


56 


Practical  Accounting  Problems. 

Dr  PROFIT   AND    LOSS    ACCOUNT.  ^^ 

1902  1902 

To vSundries . .       $866.00         BySundries..    $1,520.00 

Dec.   31,  To  Expense.  .  2,520.00         Dec.   31,  By    Commis- 

Dec.   31,  To  Interest.. .  480.00  sion 2,760.00 

Dec.   31,  To      Brown's  Dec.  31.  By   Merchan- 

share  of  net  disc 5,500 .00 

profits 5,386.43         Dec.   31,  By  Interest...         950.00 

Dec.   31,  To  Jones' 

share  of  net 

profits. . .  .  .       1.47757 

$10,730.00  $10,730.00 

Dr  BROWN'S    CAPITAL    ACCOUNT.  ^^ 

1902  1902 

June     i,To  W  i  t  h  -  Jan.      i,By  Invest- 

drawals....    $i,Soo.oo  ment $9,000.00 

Sept.    i,To  W  i  t  h  -  May     i,By  Invest- 

drawals....      2,000.00  ment 2,400.00 

Dec.   31,  To  Balance..    13,786.43         Oct.      i,  By  Invest- 
ment          800 .00 

Dec.  31,  By    share    of 

profits. . . . .  ■      5.38643 

$17,586.43  $17,586.43 

1903 

Jan.      I,  By  Balance...  $13,786.43 

Dr.  JONES'    CAPITAL    ACCOUNT  ^^ 

1902  1902 

Mar.     i,To  W  i  t  h  -  Jan.      i,By  Invest- 

drawals....    $1,600.00  ment $3,000.00 

May     i,To  W  i  t  h  -  June     i,  By  Invest- 

drawals....      1,200.00  ment 1,500.00 

Dec.  31,  To  Balance..      6,177.57         Oct.      i, By  Invest- 
ment       3,000.00 

Dec.  31,  By  share     of 

profits.. .  ..       1.477-57 

$8.977-57  $8,977.57 

1903 

Jan.     I ,  By  Balance. .    $6,177.57 

BALANCE  SHEET  OF  THE  FIRM  OF  BROWN  &  JONES, 

AS  AT  DECEMBER  31,  1902 

Assets:  Liabilities: 

Cash  on  hand $4,900 .00  Notes  Payable. .  $1,890 

Bills      Receiv-  Accounts    Pay- 
able  $12,400                                able 840 

Accounts    Re-  $2,730.00 

ceivable. . . .      2,450 

14,850.00  Notes  Receivable  Dis- 

Merchandise  Inventory    10,500 .00  counted 7.556 .00 

Capital : 

Brown....  $13,786.43 

Jones 6,177.57 

.     —    19,964.00 

$30,250.00  $30,250.00 

57 


i 


'.I 


Question  7. 

(Pennsylvania  Examination,  May.  1905.) 

The  Cambria  Company  was  incorporated  with  a  capital  of  $500,000, 
divided  into  5,000  shares  of  $ioo  each,  to  take  over  the  assets  and  liabili- 
ties of  the  firm  of  John  Martin  &  Co.,  and  Chas.  Burton  &  Co. 

John  Martin  and  Henry  Scott,  his  partner,  each  contributed  $20,000 
in  cash  to  the  company,  and  received  in  payment  stock  of  the  company 
at  par. 

Chas.  Burton  and  Thomas  James,  his  partner,  each  contributed  $15,0000 
in  cash  to  the  company,  and  received  in  payment  stock  of  the  company 
at  par. 

The  net  assets  of  the  firm  of  John  Martin  &  Co.,  were  purchased  by 
the  company  at  75%  of  their  ledger  values  and  full  paid  stock  of  the 
company  given  therefor.  The  net  assets  of  the  firm  of  Chas.  Burton  & 
Co.  were  purchased  by  the  company  at  60%  of  their  ledger  values,  and  full 
paid  stock  given  by  the  company  in  payment  therefor. 

The  condition  of  the  ledger  accounts  of  the  vendors  were  as  follows: 

ASSETS  AND  LIABILITIES  OF  JOHN  MARTIN  &  CO. 


Assets. 

Cash $5,000.00 

Real  estate   (factory  site) 15,000.00 

Machinery   and    tools 7,500.00 

Raw  stock,  lumber,  etc 1,000.00 

Raw  stock,  steel,  brass,  wire,  etc 8,000.00 

Goodwill    4,500.00 

Accounts  receivable   80,000.00 

Liabilities. 

Accounts  payable    $27,000.00 

Bills   payable 70,000.00 

John  Martin,  capital  account 18,000.00 

Henry  Scott,  capital  account 6,000.00 


$i2i,ooaoo 


$i2i,ooaoo 


ASSETS  AND  LIABILITIES  OF  CHARLES  BURTON  &  CO. 


Assets. 

Raw  stock $25,000.00 

Manufactured  stock  20,000.00 

Accounts   receivable    110,000.00 

Goodwill    45,000.00 

LlABILinES. 

Thomas  James,  capital  account $150,000.00 

Chas.  Burton,  capital  account 50,000.00 


$200^000.00 


$200,000.00 


Practical  Accounting  Problems. 

It  was  agreed  that  all  the  assets  and  liabilities  acquired  by  purchase 
should  appear  upon  the  books  of  the  company  at  the  values  shown  in  the 
"vendors"  ledgers  until  the  close  of  the  third  year,  at  which  time  goodwill 
should  be  charged  to  profit  and  loss  account. 

And,  it  was  stipulated  that  in  the  event  the  legitimate  profit  of  any 
year  from  trading  exceeded  $20,000,  the  individual  members  of  the  firm 
of  Chas.  Burton  &  Co.,  were  to  receive  30%  of  said  excess,  and  expense 
account  be  charged  therewith  but  if  the  profits  were  less  than  $20,000 
they  were  to  pay  the  deficiency  to  the  company,  and  expense  account  be 
credited  therewith. 

The  profit  and  loss  account  showed  legitimate  profits  from  trading,  for 
the  first  year  amounting  to  $27,000,  and  the  second  year  amounting  to 
$40,000,  and  the  third  year  amounting  to  $15,000,  before  adjusting  the 
claim  arising  from  above  stipulation  as  to  the  $20,000.  The  entire  profits, 
irrespective  of  their  source,  were  then  paid  to  stockholders  of  issue,  a§ 
dividends  in  full  paid  stock. 

Submit  statement  as  follows: 

First.  Give  aggregate  of  net  assets  at  the  close  of  the  first,  second, 
and  third  years,  assuming  all  debts  to  have  been  paid. 

Second.  Give  the  amount  due  to  each  of  the  parties  in  interest  in 
stock  and  undivided  profits  at  the  end  of  the  first  and  second  years 
respectively,  assuming  profit  and  loss  account  as  being  adjusted  at  these 
periods,  and  the  amount  of  stock  held  by  each  stockholder  after  the  actual 
adjustment  of  the  profit  and  loss  and  dividend  accounts,  at  the  end  of  the 
third  year. 

Third.  Use  given  assets  and  liabilities  throughout,  with  an  additional 
account  entitled  "  Increase,"  and  submit  balance  sheets  for  the  close  of 
each  period. 


Soluti* 


on. 


BOOKS  OF  THE  CAMBRIA  COMPANY 

Opening  Entries 

Subscription    $70,000.00 

Unsubscribed  stock   430,000.00 

Capital  stock   $500,ooox)0 

John  Martin  subscribes  for  200  shs.  @  $100    $20,000.00 
Henry  Scott  "      200      "       100      20,000.00 

Chas.   Burton  "      150       "       100      15,000.00 

Thomas  James  "      150      "       100      15,000.00 

Cash    $70,000.00 

Subscription $70,000.00 

50 


1 


Accounting  Problems  and  Solutions, 

John  Martin   $20,000.00 

Henry  Scott   20,000.00 

Chas.   Burton    15,000.00 

Thomas   James    15,000.00 

$70,000.00 

Real   estate — factory   site $15,000.00 

Machinery  and  tools   7,500.00 

Raw   stock — lumber,   etc 1,000.00 

Raw  stock — steel,  brass,  wire,  etc 8,000.00 

Goodwill    4,500.00 

Accounts  receivable   80,000.00 

Accounts  payable    $27,000.00 

Bills    payable    70,000.00 

John  Martin  &  Co 13,000.00 

Contingency    6,000.00 

The  book  value  of  assets  and  liabilities 

acquired  from  John  Martin  &  Co. .    $24,000.00 
Purchase  price,  75%  face  value,  payable 

in  capital  stock  of  company 18,000.00 

Cash    $5,000.00   " 

John  Martin  &  Co $5,000.00 

Transfer  of  cash  included  in  purchase. 

Subscription    $18,000.00 

Unsubscribed    stock    $18,000.00 

John  Martin  &  Co 18,000.00 

Subscription    18,000.00 

Allotment  of  capital  stock  for  equity  in 
business  of  John  Martin  &  Co.,  as  per 
agreement : 

John  Martin,  135  shs.  @  $100...    $13,500.00 
Henry  Scott,  45  shs.  @  $100 4,500.00 

$18,000.00 

Raw  stock   $25,000.00 

Manufactured    stock    20,000.00 

Accounts  receivable    1 10,000.00 

Goodwill    45,000.00 

Chas.  Burton  &  Co $120,000.00 

Contingency 80,000.00 

The  book  value  of  assets  acquired  from 

Chas.  Burton  &  Co $200,000.00 

Purchase  price,  60%  face  value 120,000.00 

Payable  in  capital  stock  of  company. 

Subscription    $120,000.00 

Unsubscribed    stock    $120,000.00 

Chas.  Burton  &  Co 120,000.00 

Subscription    120,000.00 

Allotment  of  capital  stock  for  equity  in 
business  of  Chas.  Burton  &  Co.,  as 
per  agreement: 

Chas.  Burton,  300  shs.  @  $100. .     $30,000.00 
Thomas  James,  900  shs.  @  100..      90,000.00 

$120,000.00 


Practical  Accounting  Problems. 
PROFIT    AND    LOSS. 


(first  year.) 

po  expense — Chas.  Burton  &  Co. 
30%  excess  profits,  $7,000. 

Due  Chas.  Burton,  54  sh $525.00 

Due  Thomas  James,  ^  sh...   1,575.00 


(first  year.) 
$2,100.00      By  profits  from  trading 


$27,000.00 


Net  profit  for  j^ear. 


24,900.00 
$27,000.00 


(second  year.) 

To  expense — Chas.  Burton  &  Co. 
30%   excess  profits,  $20,000 

Due  Chas  Burton,  %  sh $1,500.00 

Due  Thomas  James,  ^  sh...  4,500.00 


Balance   brought  down 

(second  year.) 
$6,000.00      By  profits  from  trading 


^et  profit — two  years. 


(third  year.) 

To   goodwill — charged   off 

^et  profit — three  years 


58,900.00 
$64,900.00 

$49,500.00 
115,400.00 


$164,900.00 


'o  stock  dividend: 

John  Martin  (185  shs.) $18,500.00 

Henry  Scott   (135  shs.) 13,500.00 

Chas.  Burton   (249  shs.) 24,900.00 

Thomas  James    (582   shs.) 58,200.00 


'o  cash  dividend: 
John  Martin  . . . 
Henry  Scott  . . . 
Chas.  Burton  .. 
Thomas  James   . 


86.06 
92.79 

66.35 
54.80 


$115,400.00 


$27,000.00 
$24,900.00 


40,000.00 


$64,900.00 
$58,900.00 


Balance   brought   down 

(third  year.3 


By  profits  from  trading $15,000.00 

By  Chas.  Burton  &  Co 5,000.00 

Due  by  Chas.  Burton,  ^  sh. .  .$1,250.00 
Due  by  Thomas  James,  ^  sh. .  3,750.00 


By    contingency — absorbed . 


Balance   brought  down. 


86,000.00 
$164,900.00 
$115,400.00 


$115,400.00 


N0TE.--T0  maintain  the  original  ratio  of  holdings  of  stock,  the  balance  of  dividend  is  apportioned 
)y  cash  payments  from  treasury.  * 


61 


i 


■liafeji 


V  "I 


Accounting  Problems  and  Solutions, 
BALANCE    SHEET. 

COMPARATIVE  EXHIBIT  OF  ASSETS  AND  LIABILITIES 


Assets. 

First  Year, 

Cash $75,000.00 

Real   estate 15,000.00 

Machinery  and  tools   —  7,500.00 

Raw    stock    34,000.00 

Manufactured    stock    20,000.00 

Accounts    receivable    190,000.00 


Second  Year. 

$75,000.00 

15,000.00 

7,500.00 

34,000.00 

20,000.00 

190,000.00 


Third  Year. 

$75,000.00 

15,000.00 

7,500.00 

34,000.00 

20,000.00 

i90,ooapQ 


Increase 


$341,500.00    $341,500.00    $341^00.00 
27,000.00       67,000.00       82,000.00 


Less  old  debts  paid 


$368,500.00    $408,500.00    $423,500.00 
97,000.00       97,000.00       97,000.00 


Less  Chas.  Burton  &  Co. 


$271,500.00    $311,500.00    $326,500.00 
2,100.00         8,100.00         3,100.00 


Net  assets    (exclusive  of  goodwill)     $269,400.00    $303,400.00    $323,400.00 

Goodwill    49,500.00       49,500.00 

Unsubscribed    stock 292/xx).oo      292,000.00      292,000.00 


$610,900.00    $644,900.00    $615,400.00 


Liabilities. 

First  Year. 

Capital   stock    (authorized) $500,000.00 

Contingency    86,000.00 

Undivided  profits  (  see  profits  &  loss) ♦        24,900.00 


Second  Year.  Third  Year. 

$500,000.00  $500,000.00 

86,000.00 

58,900.00  115,400.00 


$610,900.00   $644,900.00   $615,400.00 
*  Apportionment  of  undivided  profits. 
Due  to   stockholders: 

First  Year. 

John    Martin    $4,010.34 

Henry   Scott    2,932.93 

Chas.   Burton    5.38702 

Thomas  James    12,56971 


Second  Year, 

$5475.96 
4,004.81 

7,355.77 
17,163.46 


Third  Year 
$9,099.76 

6,655.0s 
12,223.56 
28,521.63 


$24,900,000   $34,000.00   $56,500.00 

STOCK    LEDGER. 

JOHN  MARTIN.  HENRY  SCOTT. 

Capital  stock  (for  cash) 200  shares  Capital  stock  (for  cash) .......... 

"      (for  old  business)....  135  (for  old  busmess). . . 

"  ••      (dividends)    185      "  *'  "      (dividends)    


Total  at  end  of  3  years 520  shares 

CHAS.  BURTON. 

(for  cash) 150  shares 

(for  old  business)....  300 

(dividends)    249 


Capital  stock 

M 


U 


M 


« 


it 


Total  at  end  of  3  years 

THOMAS  JAMES. 

Capital  stock  (for  cash) 

(for  old  business)., 
(dividends)    


II 


u 

M 


Total  at  end  of  3  years 699  shares      Total  at  end  of  3  years. 

62 


200 

45 

135 

shares 

380 

shares 

150 
900 
582 

share^ 

M 
M 

1.632 

shares 

Practical  Accounting  Problems, 

Question  8. 
(New  York  Elxamination,  January,  1906.) 

Walter  Hopkins,  while  perfectly  solvent  and  doing  a  profitable  manu- 
facturing business,  had  so  tied  up  his  capital  in  plant  and  materials  that 
he  was  unable  to  pay  his  debts  and  was  on  the  point  of  suspending  for 
want  of  funds  to  pay  for  labor,  and  his  creditors  were  preparing  to  com- 
mence legal  proceedings  to  enforce  a  settlement.  The  condition  of  his 
affairs  at  this  time  was  as  follows: 

BALANCE  SHEET. 


Assets. 

Plant    

Cash    

Materials,    raw    and    partly 

finished    40,400 

Finished  goods   6,070 

Accounts  receivable  3^50 


Liabilities. 

$25,198    Creditors   $20,230 

212    Capital    50,000 

Surplus    4,900 


$75,130 


$75,130 


At  a  meeting  of  creditors  he  said  that  while  his  plant  was  entirely 
cflScient,  it  was  all  of  special  character  and  would  realize  on  forced  sale 
only  the  value  of  scrap,  that  the  unfinished  goods  would  require  the  em- 
ployment of  skill  and  processes  known  to  him  only,  and  that  while  forced 
suspension  would  yield  to  his  creditors  not  over  50%,  it  would  ruin  him 
absolutely. 

The  creditors  decided  to  advance  him  a  loan  of  $5,000  to  continue 
operations  and  allow  him  additional  credit  for  materials  and  expenses. 
A  trustee  was  appointed  to  see  that  the  proceeds  were  used  solely  for  re- 
cuperation of  the  business. 

The  subsequent  operations  under  the  supervision  of  the  trustee  were 
as  follows: 

Purchases  on  book  account,  charged  to  materials  $5,ioo,  to  expense, 
$12,100;  sales  on  book  account,  $57,802;  losses  on  bad  debts,  $300;  cash 
receipts  (loan  from  creditors),  $5,000;  settlement  from  debtors,  $58,100; 
cash  payments  for  labor,  $12,500;  for  expense,  $4,350;  for  plant,  $(500. 
Creditors,  $42,030;  Walter  Hopkins  personal  drawings,  $3,000. 

There  remained  raw  materials  $4,000,  finished  goods  $22,388. 

Prepare  (a)  realization  and  liquidation  account,  (b)  trustee's  cash  ac- 
count, (c)  balance  sheet  of  the  estate  as  restored  to  Walter  Hopkins. 

Solution. 

(a)    Realization  and  Liquidation  Account. 

fj*"t  •: $25,198    Creditors   $20,230 

Materials 40400    Loan  from  creditors  5,000 

Finished  Goods  6,070  ^^^ 

Accounts  Receivable  3,250  $25,230 

$74,918 
63 


|i 


n 

Y 


Accounting  Problems  and  Solutions. 


Practical  Accounting  Problems, 


Expenses   4»350 

Labor 12,500 

Plant  600 

Creditors  (new  and  old) . . .  42,030 

134,398 
liabilities  not  liquidated. 

Creditors    400 

Net  profit  •      3>370 

$138,168 


Assets  realized. 
Accounts   Receivable    (new 
and  old) 58,100 

83,330 
Assets  not  realized. 

Plant    25,798 

Raw  Material 4,ooo 

Finished   Goods    22,388 

Accounts  Receivable  2,652 

$138,168 


(b)    Trustee's  Cash  Account. 


Amount  on  hand  (W.  Hop- 
kins)       ?2I2 

Loan  from  creditors 5,ooo 

Accounts  Receivable  58,100 


$63,312 


Labor    12,500 

Expense    4,350 

Plant    «» 

Creditors   42,030 

W.  Hopkins,  drawings 3,ooo 

Balance  on  hand    832 

$63,312 


(c)    Balance  Sheet. 

Cash    (Trustee)    $832      Creditors    -   ■■■v'-—        ^4°*^ 

Accounts  Receivable  2,652     Capital  &  Surplus . .  $54,900 

Finished  Goods  22,388     Realization   & 

Raw  Materials 4/x»         Liquidation 

Plant 25,798     Net   P.   &L     $3,370 

Less  Hopkins' 

drawings    ...  3.000    370     55.270 

$55,670  ^5.670 


Question  9. 

(New  York  Examination.  January.  1906.) 

I.  The  Parker  Construction  Company  is  unable  to  meet  its  obligations 
and  is  forced  into  liquidation.  At  the  time  the  receiver  takes  charge  of  its 
affairs  the  following  trial  balance  is  prepared  from  the  company's  books : 


Cash $500 

Land  and  buildings. 10,000 

Mortgage  on  land  and  buildings 

Plant  and  equipment 20,000 

Creditors  

Completed  contract  accounts  (losses) 18,000 

Capital   

Uncompleted  contract  accounts   (outlay) 30,000 

Securities  acquired  in  settlements 15,000 

Debtors*  accounts  for  completed  contracts 6,000 

Expenses  6,500 

Inventory  of  materials  2,000 

Profit  and  loss  (deficiency) 9,400 

$117,400 


$8/x» 
59.400 
50,000 


$117,400 


The  sureties  on  the  unfinished  contracts  estimate  that  a  further  outlay 
of  $20,000  will  be  required  to  complete  the  work  and  realize  the  contract 
price  of  $40,000,  and  their  offer  to  take  over  the  materials  on  hand  for 
$1,500,  as  part  of  said  cost,  is  accepted  by  the  receiver.  Of  the  securities 
acquired  $5,000  is  pledged  to  secure  $11,000  due  creditors,  and  $10,000  is 
pledged  to  secure  $9,000  due  creditors.  The  company  owes  for  taxes 
on  real  estate  $100  and  for  salaries  and  wages  of  employees  $1,200. 
which  sums  do  not  appear  on  the  books.  The  company  has  dis- 
counted customers'  notes  for  $3,000,  of  which  subsequent  advices  indi- 
cate that  $1,000  will  be  dishonored,  and  a  debtor  owing  $1,500  on  un- 
secured account  has  failed  and  disappeared.  It  is  estimated  that  the 
amount  realized  on  land  and  buildings  will  be  sufficient  to  satisfy  the 
mortgage  only,  and  that  plant  and  equipment  will  realize  only  6%  of  the 
book  value. 

Prepare  a  statement  of  affairs  and  deficiency  account 


65 


I 


Accounting  Problems  and  Solutions. 

Solution. 
(First  Form.) 
STATEMENT  OF  AFFAIRS 
Total  Schedule  Expected  to 

Liabilities  No.  J^^"*^ 

$8,000.00  Mortgage    f $8/)OO.oo 

59,400.00  Creditors :      Secured    $15,000.00 

Unsecured    44^00.00     44,400.00 

1,000.00  Endorsement    1,000.00 

1,300.00  Preferred  Creditors;  deducted  from  Assets 

Wages  $1,200.00 
Taxes     100.00 

ao/)00.oo  Sureties   on   Contracts 20,000.00 

Contingent  liability  for  endorsements 2,000.00 

$73400.00 

$89,70000  _  _„,„„ 

Nominal                                                          Schedule  Expected  to 

Assets                                                            No.  Produce 

$500.00  Cash  on  hand   $500.00 

15,000.00  Securities:  Pledged  with  creditors 

6,000.00  Accounts  Receivable 4,500.00 

2/xx}.oo  Materials    1,500.00 

30,000.00  Uncompleted   Contracts 40,000.00 

10,000.00  Land   and   Buildings 8/X)0.oo 

20/xx>.oo  Plant  and  Equipment 1,200.00 

$55,700.00 
Deduct  Preferred  Creditors i>3oo.oo 

$54,400.00 
Balance    (deficiency) 19,000.00 

. $73,400.00 

$83,50000  - — 

DEFICIENCY  ACCOUNT 

Capital   at  beginning  of   Receivership $40,600.00 

Deficiency  as  per  Statement  of  Affairs 19,000.00 

$59,600.00 

Expenses  prior  to  Receivership: 

Expenses    ^,500.00 

Losses 18,000.00 

Wages    1,200.00 

Taxes    ^^-^ 

Endorsement    1,000.00 

$20,800.00 

Shrinkages : 

Land  and   Buildings    $2,000.00 

Plant  and  Equipment   18,800.00 

Accounts  Receivable  1,500.00 

Materials    500.00 

$22,800.00 

Loss  on  Contract 10,000.00 

$59,600.00 

tt6 


r 


V 


t 


Total 
Liabilities 

$39,400.00 
11,000.00 


9,000.00 


8,000.00 


3,000.00 
20,000.00 


1,300.00 


$91,700.00 


Practical  Accounting  Problems, 

Solution. 

(Second  Form.) 

STATEMENT  OF  AFFAIRS 

Expected 
to  Rank 

Creditors  unsecured  $i3g^4oacx)  r 

^*         partly  secured $11,000.00  X 

Securities  at  estimated  value       5,000.00         6^ooaoo  r 

"  fully  secured   9,000.00 

Securities  at  estimated  value      10,000.00 

Surplus  to  contra   $1,000.00 

Mortgage— Fully  secured  by  Land  and  y  i 

Buildings    8,000.00  ^ 

Land  and  Buildings  expected  . 

to  produce  8,000.00  l^ 

Customers'  notes  discounted i/xxxoo 

Sureties  on  uncompleted  contracts  for 

Cash  to  be  advanced  to  complete. .      20,000.00 
Less  stock  of  materials  on  hand  taken 

over   at 1,500.00 

Fully  secured  by  "Contract  Price" — 
Deducted   Contra    18,500.00  ^ 

Preferential  Creditors: 

Wages  and  Salaries 1,200.00  ^ 

Taxes 100.00  ^ 

Deducted   Contra    $1,300.00 

$46,400.00 


Nominal 
Assets 

$500.00    Cash  on  hand   

10,000.00    Land  and  Buildings,  deducted  contra. . 
6,000.00    Sundry  Debtors:  Good 

Bad 

15,000.00    Securities  in  hands  of  creditors: 

Partly  secured 
Fully  secured 


$8,ooaoo  t^ 


1,500.00 


Expected 
to  Produce 

$500.00 


5,000.00 
10,000.00 


4,500.00  l^ 


Surplus  from  securities 


IgOOOuOD 


67 


Y 


Accounting  Problems  and  Solutions. 

2,000.00    Materials  on  hand,  turned  over  to  Sure- 
ties at   $1,500.00                          1^ 

20,000.00    Plant  and  Equipment  6% ?  1,200.00      r 

30,000.00    Cost  of  Uncompleted  Contracts.    Con-  /                        / 

tract    Price    40,000.00  ^  >                      / 

Less  Cash  required  to  complete......  18,500.00  y    21,500.00  V 

$28,700.00 
Deduct  Preferential  Creditors i>3000Q 

$27,400.00 
Deficiency    19.000.00 

$83,500.00  $46400.00 


Practical  Accounting  Problems. 


Question  9a. 

(New  York  Examination,  June.  1909.) 

A  firm  manufacturing  but  one  grade  of  cloaks,  insured  against  bur- 
glary, claims  to  have  been  robbed  on  the  night  of  September  10. 

The  proof  of  the  loss  filed  by  the  assured  contained  two  items  for 
600  cloaks,  $12,000;    silk,  1,000  yards,  $1,500. 

An  inventory  of  stock  on  hand,  consisting  of  cloaks,  cloth  and  silk, 
had  been  taken  January  i,  amounting  to  $118,500,  the  particulars  of 
which  have  been  lost  or  destroyed. 

An  analysis  of  the  firm's  books  produced  the  following  information: 

Purchases  of  cloth,  37,500  yards  at  $1.00 

"  silk,     10,000  yards  at    2.00 

6,000  cloaks  were  manufactured,  consuming 

cloth,  40,000  yards  at  $1.00 

silk,     10,000  yards  at    2.00 

9,000  cloaks  were  sold  between  Jan.  i.  and  Sept.  10 

Cost  of  sales,  per  cloak,  for  material $10 .00 

"  '*  for  labor  and  sundries 7 .  00 

$17.00 

Inventory,  September  11,  2.500  cloaks,  at $17 .00 

12,500  yards  cloth  at i . 00 

5,000  yards  silk  at 2  .00 

Prepare  a  report  proving  or  disproving  the  claim. 


!"■' 


I"' 


€^ 


69 


Accounting  Problems  and  Solutions. 


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Practical  Accounting  Problems. 


Question  10. 


fu,J 


(The  following  problem  which  was  submitted  to  students  in  the  Evening  School  of 
Accounts  and  Finance,  University  of  Pennsylvania,  is  closely  similar  to  several  C.  P.  A. 
problems  in  partnership  adjustments.) 


/ 


ri 


Harvey  French  and  Andres  Deyo  were  partners  in  the  business  of 
manufacturing  lathes,  sharing  profits  equally.  Deyo  was  the  financial  man, 
having  charge  of  the  books  and  accounts;  French  had  invented  the  lathe 
and  knew  the  practical  part  of  the  business.  On  January  i,  1899,  Deyo 
retired  from  the  concern.  The  capital  accounts  of  the  two  partners  on 
that  date  stood ;  French  $15,000,  and  Deyo  $16,000.  French  agrees  to  pay 
Deyo  for  his  half  interest  in  the  business  the  sum  of  $20,000.  Of  this 
amount  $5,000  was  paid  in  cash  (from  the  funds  of  the  firm)  and  for 
the  remainder  Deyo  accepted  French's  note  which  was  secured  by  a 
mortgage  on  French's  dwelling  house.  Because  of  French's  lack  of 
knowledge  regarding  accounts,  the  cash  payment  alone  appeared  oii  his 
books. 

French  conducts  the  business  himself  for  five  years.  He  was  not  aware 
of  the  fact  that  Deyo  had  regularly  depreciated  machinery  10  per  cent  per 
year  (on  the  reducing  basis)  and  failed  to  take  depreciation  into  considera- 
tion when  closing  his  books.  The  Profit  and  Loss  Account  on  his  books 
shows  profits  for  these  five  years  to  have  been  $5,000,  $5,300,  $6,750,  $8,500 
and  $10,600.    French  has  withdrawn  over  and  above  salary  $16,250. 

Elmer  Savage,  a  friend  of  French,  also  a  practical  machinist,  has  come 
into  possession  of  a  large  inheritance.  He  knows  the  flourishing  condition 
of  French's  business  and  wishes  to  buy  a  half  interest.  The  premises 
which  French  had  been  occupying  were  poorly  adapted  to  the  needs  of  the 
business.  They  both  are  of  the  opinion  that  a  modem  factory  building 
would  very  materially  reduce  the  cost  of  production,  and  also  facilitate 
prompt  delivery.  They  agree  that  the  good-will  is  worth  three  times  the 
average  profits  for  the  last  five  years..  Savage  is  to  obtain  a  half  interest 
in  the  business  and  good-will,  by  investing  cash  equal  to  the  capital  account 
of  French  on  January  i,  1904,  also  cash  equal  to  half  the  good-will. 

French's  bookkeeper,  on  January  i,  1904,  makes  up  the  following  state- 
ment : 

Cash,  $150;  Machinery,  $45,000;  Accounts  Receivable,  $14,000;  Fin- 
ished Lathes  (20)  costing  $500  each,  selling  price  $750;  Half-finished 
Lathes  (10)  costing  $325  each;  stock  of  Bar  Iron,  Ostings,  Wheels, 
Extras,  and  other  supplies,  $3,500 ;  with  liabilities  in  the  shape  of  Accounts 
and  Bills  Payable  amounting  to  $30,000. 

The  above  figures  do  not  take  into  consideration  depreciation  on 
machinery.  French  has  bought  machinery  for  plant  during  the  five  years 
as  follows :   $3,000,  $3,500,  $4,000,  $4,500,  $5,000  respectively. 

It  is  desired  to  place  the  full  value  of  the  good-will  account  on  the 
books.  Savage  is  admitted  as  of  January  i,  1904,  on  the  above  terms  and 
according  to  the  figures  given  above. 

Show  the  entries  necessary  to  giv*,**.  effect  to  the  wishes  of  the  partners. 

71 


'V 


K 


.-7 


K 


;.| 


/ 


I 


i 


/t 


Accounting  Problems  and  Solutions. 

On  March  i,  the  Garvin  Machine  Company  instructs  French  to  deliver 
Jwojiiachines  which  French  had  been  holding  for  shipping  instructions 
since  September,  1903.  The  bookkeeper  then  awakes  to  the  fact  that  these 
had  been  charged  on  his  books  on  September  20,  1903 ;  that  he  had  over- 
looked this  charge  and  had  included  them  in  his  inventory.  The  partners  /' 
agree  to  make  the  correct  adjustment  at  the  end  of  the  year.  Being,  how- 
ever, unable  to  arrive  at  an  agreement  at  that  time  they  call  in  an  account- 
ant who  finds  the  following  facts  recorded  on  their  books: 

Cash,  $1,000;  Machinery,  $50,000;  Building  and  Real  Estate,  $40,000; 
Accts.  Rec.  Good,  $9,000;  Sales,  $122,480;  Purchases  from  January 
I  to  date,  $50,000;  Wages,  $36,000;  Rent,  $3,000;  Mfg.  Expenses,  $10,000; 
Selling  and  Adminis.  Exp.,  $6,000;  Accts.  Pay.,  $4,000;  Expense  of  mov- 
ing machinery,  $7,375;  Good-will,  (?);  French  Capital  Acct,  (?); 
Savage  Capital  Acct,  (  ?)  ;  Stock  on  hand:  5  finished  lathes  at  $500  cost, 
14  half  finished  at  $325,  and  raw  material  and  supplies  amounting  to 
$8,000. 

While  moving  the  machinery  from  the  old  building  to  the  new  factory 
it  was  necessary  to  work  overtime  in  order  to  get  out  lathes  to  fill  orders 
for  customers,  for  which  wages  were  paid  at  the  rate  of  time  and  a  half. 
The  amount  of  such  overtime  was  $9,000  and  is  included  in  the  $36,000 
mentioned  above. 

Both  partners  are  fair  minded;   neither  desires  to  obtain  an  advantage 

^vcr  the  other.    Both  agree  on  a  depreciation  from  January  i,  1899,  at 

the  rate  of  10  per  cent,  on  the  reducing  basis ;    also  agreeing  that  a  con- 

tribution  shall  be  made  by  the  partner  having  the  lesser  capital  to  bring 

^his  interest  up  to  that  of  the  other,  also  that  in  distributing  the  profits 

*/  for  the  present  year  an  allowance  of  6  per  cent,  interest  on  excess  capital 

invested  during  the  past  year  shall  be  made. 

Make  a  statement  to  be  given  to  the  partners  and  show  on  this  state- 
ment the  amount  necessary  to  be  contributed,  also  the  division  of  profit 
for  1904  and  make  any  correcting  entries  you  think  necessary. 

Solution.  > 

To  give  effect  to  the  wishes  of  the  partners  the  following  entries  should 
be  made  on  the  books  of  Freiich  and  Savage :  * 

Jan.i.  Goodwill,!]^ $21,690.00 

To  French  CapitafTVccount $21,690.00 

Value  of  Good  Will  as  agreed  upon  by 
French  and  Savage,  viz. : 

Total  Profit  Jan.  i,  i^,  to  Dec.  ^i. 
1903  $36,150  -^ 

Average  Profit  one-fifth,  or $7,230 

Value  of  Good  Will  as  agreed  upon  by 
French  and  Savage  (three  times  aver- 
age profit)   .,,*., 21,690 


72 


-    / 


-y  I  ■■■■ 


Practical  Accounting  Problems, 

Jan.  1",  Cash,  Dr $56,745-00 

To  Savage  Capital  Account. .St $56,745-00 

Investment  of  Savage: 

One-half  Good  Will $10,845 

French  Capital  Account  45,900 

$56,745 

Jan.  I.  French  Capital  Account,  Dr $5,422^0 

To   Savage    Capital   Account $5,422^50 

To  equalize  the  interests  of  the  part- 
ners in  the  Good  Will. 

The  following  correcting  entries  are  necessary  on  the  books  of  French 
and  Savage: 

Sundries,  lOr.  to  Good  Will $9,665.36^^ 

AFrench  Capital  Account  $5,249*02 

^Savage  Capital  Account 4,416.34 , 

Correcting  the  valuation  of  Good  Will  as 
follows: 

Value  placed  on  books  Jan.  i,  1904 $21,690.00 

Revised  valuation  after  taking  into  con- 
sideration depreciation  on  machinery, 
and  the  error  in  inventory: 
Profit  for  five  years,  $20,041.07. 
Good  Will   will   be  three-fifths,  or 12,024.64  • 


Excess   charged   back $9,665.36  «^ 

French's  Capital  Account  received  credit 
for  three- fourths;  of  the  original  valua- 
tion, or  $,16,267.50. 

Of -the   revised   valuation   his    account 
should   receive   credit   for   the  value      '       / 
of  the  Good  Will  on  Jan.  i,  i899-($8,-*^       /  / 
000.00),  plus  three-fourths  tl;ie  increase 
in   value   of  Good   Will    ($3,018.48), 
making  a  total  credit  of  $11,01^4^. 

The  difference  ($5,249.02)  between    the 
amount    first    credited     ($16,267.50),"  ' 
and  the  above  figures  ($11,0 18.48)  ^ust  J         ,    ,^ , 
be  charged  back.  , 

Savage's  Capital  Account  received  credit 
for  one-fourtli7of  the  original  valua- 
tion, or  $5,422.50.  Of  revised  valua- 
tion he  should  obtain  credit  for  one- 
fourth  the  increased  valuation  since  ^ 
Jan.  I,  1899,  or  $t,oo6j6. 

Difference  to  be  charged  back,  $4416.34. 

73 


A' 


■mil 


ft* 


"^W 


■C 


.) 


Illf^^ II 

pill 


&. 


Accounting  Problems  and  Solutions. 

French  Capital  Account,  Dr 

To  Reserve  for  Depreciation  on  Machinery 

Depreciation.  1899 $2,800.00* 

"     1900 2,870.oot 

"     1901 2,983.00.x 

"     1902 3»i34-70' 

1903 3,321.23* 

$15,108.93 
Merchandise 


$16,108.93 
15,108.93 


$i,ooaoo 


Error  in  Inventory  of  Finished  Lathes, 
two  machines  which  were  charged  to 
Garvin  Machine  Co.,  Sept.,  1903,  being 
included  in  the  list  of  finished  lathes  at 
$500.00  each. 


/ 


French's  Capital  Account  on  January  i,  1904,  should  have  shown  a 
balance  of  $37,791.07.  This  amount  is  reached  by  deducting  from  $45,900 
the  amount  charged  back  per  above  entry  and  adding  the  value  of  Good 
Will  as  of  January  i,  1899,  $8,000.00.  - 

The  amount  which  Savage  should  have  invested  according  to  the 
revised  valuations  is  $39,803,39.  or  the  sum  of  $37,79i07  and  $2,012.32  (one- 
half  increase  in  value  of  Good  Will). 


To  adjust  the  matter  of  interest  between  the  partners  the  following 
entry  is  necessary: 

French  Capital  Account,  Dr $508.25 

To  Savage  Capital  Account $508.25 

Capital  Account  of  French   ../ $40,809.55 

Capital  Account  of  Savage   . . .-?. 57,75i-i6  ^  '     " 

Total  Capital $98,560.71 

/!) 
Savage's  capital  being  $8470.81  in  ex-  . 

cess  of  one-half,  he  is  entitled  to  inter-  f  ^ 

est  on  this  amount,  or  a  credit  of 
$508.25  French's  Capital  Account  as 
revised  being  $8,470.81  lower  than 
one-half,  he  is  chargeable  with  a  like 
amount  of  interest 


74 


\ 


Practical  Accounting  Problems. 

Profit  and  Loss  Account— French  &  Savage,  December  31,  1904. 
Sales  $122,480.00'- 

Inventory,  January  i,  1904 $I5,750  -  :  '  ^ ''  ^  .'^^ 

Purchases  during  year 50,000**  £^« 

$65,750 
Inventory,  January  i,  1905 15,050     * 

Cost  of  Material $50,700.00 

Wages   36,000-' 

Less  increased  cost  due  to  removal  to  new 
factory 3,000 

33,000.00 

Rent 3,000.00  • 

Manufacturing  expenses  10,000.00* 

Depreciation  on  Machinery,  1904 3489.11 1 

Total  manufacturing  cost   $100,189.11 

Gross  Front 22,290.89 

Selling   and   Administration   Expenses $6,000.00  ^ 

Removal  Expenses  to  new  factory  (20%  of        y 

total,  $10,375)   . .  (\'})!\'^ 2,075.00^ 

•  »  ^ijTT^  8,075.00 

Net  Profit  for  year $14,215.89     S 

BALANCE   SHEET. 

French  &  Savage— January  i,  1905. 

Assets. 

Cash   $1,000.00  *— 

Accounts  receivable 9,000.00  *<w 

Stock  on  hand: 

5  finished  Lathes  @  $500 $2,500.00  r  "* 

14  half  finished  Lathes  @  $325 4,55o.oo,. 

Raw  material  and  supplies 8,000.00,. 

— ^^^—    i5j050.0Ok  "^ 

Machinery  so,ooo.oo»- 

Less  reserve  for  depreciation 18,598.04  ^/ 

3i,40i.96» 

Building  and  real  estate 40,000.00 <i/ 

Removal  expenses  to  new  factory io,375-00     , 

"^  Less  20%  charged  off 2,075.00  ^ ' 

8,300.00 

Good  Will 12,024.64 \0^' 

$116,776.60 
75  "— — — " 


^-i 


M/ 


f 


*    J    . 


Accounting  Problems  and  Solutions. 

Liabilities.  / 

Accounts  payable $4,000.00  J^ 

Capital    112,776.60^ 

French's  Capital  Account   $40,809.55 

Add  one-half  profit,  1904 $7,107.94 

Deduct  interest  on  deficit  capital...     508.25 

6,599.69 

Total  Capital,  Dec.  31,  1904.  $47,409.24  r 

Savage's  Capital  Account 57i75i.i6 

Add  one-half  profit,  1904 $7,107.95 

Add  interest  on  excess  capital 508.25 

7»6i6.2o 

Total  capital,  Dec.  31,  1904..  65,367.36 1 

$112,776.60 

$1 16,776.60  r* 

If  no  part  of  the  profits  is  withdrawn  by  either  partner,  French  must 
contribute  the  difference  between  $47,409.24,  the  amount  of  his  capital 
account,  and  $65,367.36,  the  amount  of  Savage's  capital  account,  or 
$17,958.12. 


76 


A- 


Practical  Accounting  Problems. 
Question  1 1 . 

(State  of  Washington  Elxamination,  April,  1906.) 

»  r 

Before  making  the  charges  referred  to  below,  the  profit  and  loss 
account  of  a  corporation  for  the  year  shows  a  credit  balance  of  $60,000.00. 
The  accounts  receivable  are,  $40,700,  and  the  plant  and  the  machinery 
account  is  $55,000.  The  6%  preferred  stock  is  $50,000  and  the  common 
stock  $150,000.  It  is  decided  (a)  to  provide,  out  of  the  above  named  profit 
and  loss  balance  7^%  depreciation  on  plant  and  machinery;  (b)  to 
write  off  as  uncollectible  $1,500  of  the  accounts  receivable  and  to  make 
a  reserve  of  2%  on  the  remainder  of  the  accounts  receivable  to  provide 
for  possible  losses  thereon;  (c)  to  provide  for  the  preferred  stock  divi- 
dend for  the  year;  (d)  to  provide  for  a  bonus  of  $7,500  to  the  employees; 
(e)  to  provide  for  a  dividend  on  the  common  stock  of  15%  for  the  year; 
and  (f)  to  carry  the  balance  then  remaining  on  profit  and  loss  account 
to  undivided  profits  account. 

Draft  entries  to  comply  with  the  above  provisions. 

Solution. 

Profit   and   Loss $4,125 

To  Reserve  for  Depreciation $4,125 

A  charge  of  7J^%  for  depreciation  on  Plant  and 
Machinery 

Profit   and   Loss $2,284 

To   Accounts   Receivable $1,500 

Reserve  for  Bad  Debts 784 

For  $1,500  of  bad  debts  written  off  as  uncollectible, 
and  a  reserve  of  2%  on  the  remaining  Accounts 
Receivable  for  possible  losses 

Profit   and   Losss $3,ooo 

To    .    .    .    Dividend  on  Preferred  Stock $3,000 

6%  dividend  on  preferred  stock 

Profit   and   Loss $7,500 

To  Bonus  to  Employees $7»500 

A  bonus  set  aside  and  to  be  paid  to  employees 

Profit  and  Loss   $22,500 

To      ...    Dividend  on  Common  Stock $22,500 

A  15%  yearly  dividend  on  the  common  stock 

Profit   and   Loss $20,591 

To   Undivided    Profits $20,591 

Transfer  of  final  balance  after  adjustments 

77 


1 


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' 


Accounting  Problems  and  Solutions, 
Question  12. 

(The  following  problem  is  one  submitted  to  students  in  the  New  York  University 
School  of  Coonmerce,  Accotmts  and  Finance.) 

From  the  accompanying  trial  balance  of  the  books  of  B  Company,  iron 
manufacturers,  prepare  such  statements  as  are  necessary  to  show  the  value 
of  its  capital  stock. 

The  inventory  at  the  end  of  the  period  is : 

Material $1,266.00 

Orders  in  process    15,36900 


$16,635.00 


Make  such  provision  for  depreciation  as  you  think  proper.  The  stock 
in  the  show  room  consisting  of  ornamental  iron  and  bronze  work  has  not 
deteriorated.  The  drawings  and  models  represent  two  years'  outlay,  all  of 
which  is  carried  as  assets,  but  they  have  no  realizable  value.  Factory  al- 
terations and  improvements  are  to  be  spread  over  a  period  of  ten  years 
represented  by  the  lease  of  the  factory. 


Tkial  Balance  at  End  of  Period. 

Inventory    $4,328.91 

Purchases 13,852.33 

Wages    9,49919 

Factory  expense  242.11 

Sales    

Cash  Discounts  Received  on  Purchases 

Allowances    195-34 

Rent   300.00 

General    Expense    312.87 

Insurance   354-54 

Commission    4S-00 

Cartage  on   deliveries 166.09 

Salaries    3.031-49 

Cash 4991 

Bank    2,651.73 

Accts.  Receivable  Good 5,336.29 

••            "           Doubtful 2,211.97 

Deposits  on  Contracts  500.00 

Loans  Good  4408.13 

Show   room   stock    1,812.50 

78 


$15,794.79 
41741 


Practical  Accounting  Problems. 

Plant 

Machinery    $4,399-78 

Tools    2,325.66 

Drawings   311.66 

Models    2,107.55 

Office  furniture  and  fixtures 759-29 

$59,202.34 

Factory  alterations  and  Improvements  852.59 

Notes  payable    

Capital  stock  authorized    $25,000.00 

Capital   stock  unissued    10,000.00 

Surplus 

$60,05493 

Solution. 

Manufacturing  Statement. 

Debits 

Inventory  at  beginning  of  period $4,328.91 

Purchases    13^52.33 

Wages  9499.19 

Factory  expenses 242.11 

Rent   300.00 

Depreciation 

Machinery  (@  10%  per  annum) ....  $43998 

Tools  @  20%  per  annum  465.14 

Drawings  one-half  total  cost 155-83 

Models  one-half  total  cost   1,053-78 

Factory  alterations  @  10%  per  annum         85.26    2,199.99 

$30422.53 

Credits 

Inventory  at  end  of  period 

Balance,  Cost  of  Manufacture,  carried  to  Trading 
Statement    


Trading  Statement. 
Debits 
Balance,    Cost   of   Manufacture,    from 

Manufacturing   Statement   

Salaries    $3,03M9 

Cartage  on  deliveries 166.09 

Commissions   45.00 

Insurance  354-54 

79 


$14,550.00 


15,000.00 
14,292.73 

$60,05493 


$16,635.00 

13,787-53 
$30422.53 


$13,787.53 


V  1  i: 


*  ii 


Accounting  Problems  and  Solutions. 

General   expenses    $312.87 

Reserve  for  doubtful  accounts  receivable  ....  2^11.97 

Reserve  for  good  accounts  receivable  (2%) 106.73 

Depreciation  of  office  furniture  and  fixtures...  75.93 

Models,  previous  year's  expense  written  off $1,053.77 

Drawings,  previous  year's  expense  written  off. .       155.83 


Credits 

Sales $15,794.79 

Less  allowances   195.34 

Cash  discounts 

Balance,  for  the  year,  carried  to  Surplus  Account 


Statement  of  Assets  and  Liabilities. 
Assets. 

Cash  on  hand  and  in  bank $2,701.64 

Accounts   receivable  good $5,336.29 

Accounts    receivable    doubtful 2,211.97 

$7,548.26 
Less  reserve  for  doubtful  debts 2,318.70    5,229.56 

Deposits  on  Contracts  500.00 

Loans 4,408.13 

Inventory 

Material    $1,266.00 

Orders   in   process    15,369.00  16,635.00 


Show   Room    Stock 

Plant 

Machinery    $4,399-78 

Less  Reserve  for  Depreciation 43998    -3,959.80 

Tools    $2,325.66 

Less  Reserve  for  Depreciation 465.14     1,860.52 

Office  Furniture  and  Fixtures $759-29 

Less  Reserve  for  Depreciation 75.93       683.36 

Factory   Alterations    


Liabilities 
Notes  Payable   

Capital  Stock 

Authorized    $25,000 

Unissued    10,000 


Surplus $14,292.73 

Less  loss  for  the  period 5,^89 


8O' 


$6,304.62 

1,209.60 
$21,301.75 


$15,59945 

417.41 
5,284.89 

$21,301.75 


1,812.50       $31,286.83 


6,503.68 
767.33 

$38,557.84 
$14,550.00 

'  15,000.00 

9,007.84 
$38,557.84 


Practical  Accounting  Problems. 

Statement  as  to  Value  of  Capital  Stock. 

This  being  a  manufacturing  company,  the  stock  should  pay  10%  anntia! 
dividends  regularly  to  make  it  worth  par.  Although  the  year's  business 
resulted  in  a  loss,  the  dividend  may  be  declared  out  of  the  surplus  of 
$9,007.84  remaining.  The  iron  business  is  one  subject  to  extremes  of 
prosperity  and  depression,  and  the  period  under  review  must  have  been 
a  lean  year  indeed,  for  goods  costing  $13,787-53  to  manufacture,  and 
$6,304.62  to  sell— a  total  cost  of  $20,092.15— were  sold  for  $i5'599-45-  With- 
out comparing  these  figures  with  those  of  previous  years  it  is  not  possi- 
ble to  tell  whether  the  loss  is  due  entirely  to  too  low  selling  prices  or  to 
increased  cost  of  material  and  labor.  At  any  rate  it  is  an  abnormal 
year,  and  as  the  concern  has  current  assets  of  $31,286.83  as  against  liabil- 
ities of  only  $14,550.00,  and  is  in  a  position  to  pay  the  regular  dividend  of 
ten  per  cent.,  the  capital  stock  issued,  $15,000,  is  worth  par. 


81 


- mill y.iiiHyiimiiiwMn.i.~ 

■"giliilii 


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Accounting  Problems  and  Solutions, 

Question   13. 

(Illinois  Examination.  May,  1906.) 

Two  printing  and  stationery  houses  decide  to  combine  their  businesses 
lor  the  purpose  of  reducing  expenses.  An  accountant  is  called  in  to 
examine  the  books  of  each  company  and  report  upon  the  financial  con- 
dition of  each  and  also  upon  the  past  profits.  Owing  to  the  fact  that 
corporation  A  has  never  separated  its  purchases  as  between  its  retail 
and  its  manufacturing  department,  he  finds  it  impossible  to  prepare  a 
combined  profit  and  loss  account  showing  the  gross  profit  of  the  retail 
departments  and  the  manufacturing  departments  of  each  company.  The 
following  statement,  however,  exhibits  a  summary  of  their  combined 
trading  accounts: 

Total   sales    $372,000.00 

Cost  of  material  in  goods  sold. . .  $185,000.00 
Manufacturing  labor    64,000.00    .       249,000.00 

Gross  profit    $123,000.00 

Less  total  expenses 93,000.00 

Net  profit $30,000.00 

The  amalgamation  is  effected,  and  after  carrying  on  the  business  for 
twelve  months  an  inventory  is  taken  and  the  books  closed.  It  is  found 
that  instead  of  realizing  a  profit  of  $30,000.00,  they  have  only  made  a 
profit  of  $14,000.00. 

An  analysis  of  the  various  accounts,  made  by  their  accountant,  showed 
the  following  summarized  statement: 

Retail  Department. 

Total  sales  $176,000.00 

Less  cost  of  merchandise 119,000.00 

Gross  profit  retail  department. . . .  $57,ooaoo 

Manufacturing  Department. 

Total  sales  $181,000.00 

Less    cost    of    material 

in   merchandise $64,000.00 

Less  cost  of  manufac- 
turing labor  63,000.00  $i27,ooaoo 

Gross  profits  manufacturing 

department   $54,000.00 

$111,000.00 
Less  expenses  97,000.00 


V 


Practical  Accounting  Problems. 

As  a  basis  of  comparison  with  the  former  year's  results,  the  percent- 
ages of  corporation  B,  in  respect  to  their  retail  department  and  manti- 
facturing  department,  may  be  accepted  as  applying  to  the  whole  of  that 
year's  results  of  the  combined  companies.  These  percentages  were  as 
follows : 

Retail  Department. 
Sales   100.0% 

Cost  of  merchandise  70.5% 

Gross  profit   29.5% 

Manufacturing  Department. 

Sales   100.0% 

Cost  of  material  in  merchandise 30.0% 

"      "  manufacturing  labor   35-5% 

65.5% 
Gross  profit 34-5% 

From  the  above  information  work  out  by  percentages  and  show  the 
causes  affecting  the  reduction  in  profits  from  $30,000.00  to  $14,000.00. 


'1 


$14,000.00 


82 


8^ 


Accounting  Problems  and  Solutions, 


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Practical  Accounting  Problems. 

Question   14. 

(Michigan  Examination,  July,  1906.) 

Following  is  a  list  of  the  Accounts  appearing  on  the  Trial  Balance 
of  a  Manufacturing  Company  which  deals  in  finished  Merchandise  pur- 
chased as  well  as  in  its  own  products.  From  this  list,  and  without  using 
figures,  draw  up  plans  of  Financial  Statements  (Balance  Sheet,  Manu- 
facturmg  Account,  Profit  and  Loss  Account,  etc.)  in  the  form  which  you 
thmk  most  suitable: 

Accounts  Payable 
Salaries,  Management 

Capital  Stock 

Bills  Receivable 

Cash 

Bills  Payable 

Salaries,  Office  and  Store 

Real  Estate 

Fuel 

Insurance  (Plant) 

Light 

Freight   (on  Merchandise  purchased) 

Machinery  and  Tools 

Freight  (on  Raw  Materials) 

Buildings 

Sales   (own  product) 

Inventory  (own  products) 
(Raw  Materials) 
**  (partly   Manufactured    CJoods) 

"  (Merchandise  purchased) 

**  (Repair  Supplies) 

Sales   (Merchandise  purchased) 

Undivided  Profits  (end  of  last  year) 

Purchases  (Merchandise) 

Rent,  Factory 

Rent,   Store  and  Office 

Printing  and  Stationery 

Accounts  Receivable 

Advertising 

Purchases  (Raw  Material) 

Machinery  Repairs 

Productive  Labor  (Factory) 

Labor  (Warehouse) 

Office  Furniture 

Reserve  for  Bad  and  Doubtful  Accounts 

Reserve  for  Depreciation 

Insurance  (Merchandise) 

Bad  and  Doubtful  Accounts. 

Travelers*  Expenses  and  Salaries 

Management  Salary,  Factory 

Management  Salary,  Office 

Discounts  allowed 

Interest    Payable 

Depreciation 

Sundry  Factory  Expenses 

Sundry  Office  Expenses 

Postage 

Subscriptions  and  Donations 

Discounts  Received 

Rents   (Receivable) 

Insurance  unexpired,  Plant 

Insurance  unexpired,  Merchandise 

8s  "  '' 


\  » 


1 ' 


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u 


1 

I 


Accounting  Problems  and  Solutions. 
Solution. 

MANUFACTURING  ACCOUNT. 


To  Inventory    of    Raw 

•>    Materials $. 

Inventory  of  partly 
manufact'd  goods.     . 

Purchase  of  Raw 
Materials 

Freight  on  Raw  Ma- 
terials  

Productive  Labor. . .  _. 

To  Balance  from  prime 
cost $. 

Fuel 

Light 

Machinery  Re- 
pairs  

Less  Inven- 
tory  

Repair    Sup- 
plies  

Depreciation  (on 
Buildings,  Ma- 
chinery and  Tools. 

Insurance   on 

plant 

Less    unex- 
pired  

Management   Salary 

Rent  of  factory 

Sundry  Factory  Ex- 
penses  


By 


Inventory  of  Raw 
Materials  at  the 
end  of  the  period.  \ 

Goods  in  process  of 
manufacture  at 
the   end   of   the 
period 

Balance    (First    or 
prime  cost  of 
goods  manufact'd) 
during  the  period 


By  Cost  of  Production. 


Practical  Accounting  Problems. 


(n^ 


To  Inventory    (Mdse. 

b't.) 

Purchases 

Freight  Inward 

Gross  Profit  on  goods 

bought 


By  Sales   (Mdse.   b't.), 
less   returns,    al- 
lowances, etc. ...   $ . 
Inventory    (Mdse. 
b't.)  at  the  end  of 
the  period 


PROFIT  AND  LOSS  ACCOUNT. 


* 


TRADING  ACCOUNT. 


5> 


To  Inventory  (our  own 
product) 

Manufacturing    Bal- 
ance  

Labor  (Warehouse). 

Salaries,    Manage- 
ment  

Rent,   Store  and 
Office 

Salaries,    Store   and 
Office 

Insurance 

(Mdse.) 

Less    unex- 
pired  


By  Sales  (our  own  pro- 
duct),    less     re- 
turns,      allow- 
ances, etc 

Inventory  (our  own 
product)  at  the 
end  of  the  period 


Advertising 

Travelers'  Expenses 

and  Salaries 

Discounts  allowed.  . 
Gross  Profit  (our  own 

goods) 


85 


To  Management  Salary, 
Office 

Depreciation  of  Of- 
fice Furniture.  . .  . 

Printing  and  Sta- 
tionery  

Postage 

Office  Expenses 

Bad  and  Doubtful 
Debts 

Subscriptions  and 
Donations. 

Balance,  being  ordi- 
nary profit  on  the 
business    for    the 


By  Gross  Profit  on  our 

own  product $. 

Gross     Profit     on 
goods  bought 


current  year. 


To  Interest  Payable.  . . 

Net  Profit    for    the 

year 


To  Surplus $. 


By  Balance,  being  or- 
dinary profit  for 

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Practical  Accounting  Problems. 

Question  15. 

(New  York  Examination,  June,  1906.) 

The  following  is  the  trial  balance  of  the  Arlington  Manufacturing  Co. 
at  the  close  of  business,  December  31,  1904,  the  end  of  the  second  nscal 
year  of  the  company's  operations: 


Cash 

Land 

Buildings 

Machinery 

Tools  and  implements 

Horses,  wagons  and  harness 

Office  furniture 

Bills  receivable 

Accounts  receivable 

Investments 

Salesmen's  accounts,  advances  on  salaries 

Organization  expenses,  $15,000,  less  2% 

Goodwill 

Bills  payable 

Accounts  payable 

Special  accounts — officers  and  clerks 

Reserve  for  bad  debts — less  accounts  written  oflF 
depreciation — buildings  2^% 

"  machinery  6% 

"  horses,   wagons,   etc. 

10% 

Capital  stock  10,000  shares  at  $100 

Sales  less  returns  and  allowances 

Rent  of  part  of  business  premises 

Inventory  December  31,  1903 

Purchases,  including  furniture  and  cartage 

Labor — ^factory  pa3rrolls 

Salaries  of  officers,  clerical  force 

Salaries  of  salesmen 

Advertising 

Taxes ! 

Interest  and  Discount 

Maintenance — ^repairs,  buildings,  machinery, 

horses  and  wagons.  / 

Profit  and  Loss,  1903,  surplus 

Expenses,  stable,  office,  legal,  and  unclassified  . . 


II 


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II 


II 


$25,324 

100,000 

200,000 

300,000 

40,430 

30,000 

5.30I 

25,812 
163,374 

20,000 
1,960 

14,700 

200,000 


104,621 

395.662 

600,400 

75.120 

60,440 

50,300 

4,020 
2,600 
6,500 

26,942 

•    ••••• 

29.750 


$2,483,156 


$42,000 

98,511 
15.363 

112 

S.ooo 
18,000 

3.000 

1,000,000 

1,240,600 

500 


60,070 


$2,483,156 


Note: 

Inventory  December  31,  1904 $270,560 

Factory  payrolls  accrued  but  not  paid.  . .         5, 75© 
Unexpired  insurance 912 

From  the  trial  balance  and  notations,  prepare  a  trading  account  and  a 
Profit  and  Loss  Account,  writing  off  2%  of  organization  expense.  After 
stating  the  net  profits  for  the  year,  make  the  same  reserves  for  deprecia- 
tion as  were  made  at  the  end  of  the  first  or  preceding  year.  Show  as  a 
final  balance  at  credit  of  Profit  and  Loss  the  surplus  available  for  divi- 
dends.   Also  prepare  a  balance  sheet  as  at  December  31,  1904. 

89 


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Accounting  Problems  and  Solutions. 

Question  16. 

(State  of  Washington  Examination,  June,  1906.) 

A  and  B,  who  had  hitherto  been  in  business  separately,  decided  to 
enter  into  partnership  on  July  i,  1905.  The  Balance  Sheets  of  A  and  B 
were  on  that  date  as  follows: 


Liabilities. 
Accounts  Payable.  .$1,000 
Capital  Account. . .  .  5,000  $6,000 


$6,000 


Assets. 

Furniture $  750 

Accounts   Receivable    (face 

value) 2 ,500 

Merchandise 3>S5o 

Cash 200 


$6,000 


B. 


Liabilities. 
Accounts  Payable . .  $  i , 500 
Capital  Account . . .  3,000  $4,500 


$4,500 


Assets. 

Furniture $  600 

Accounts  Receivable  (face 

value) 1,500 

Merchandise 2,000 

Cash 400 


$4.5;oo 


It  was  agreed  that  A  and  B  should  make  over  their  respective 
accounts  receivable  at  $200  and  $150  less  than  the  face  values  shown  in 
the  Balance  Sheets,  these  amounts  to  be  charged  against  their  Capital 
Accounts  and  carried  on  the  partnership  books  as  a  reserve  for  bad  and 
doubtful  accounts.  Of  B*s  furniture,  only  $250  was  to  be  taken  over  by 
the  partnership.  With  the  above  exceptions  the  assets  and  liabilities  of 
the  parties  were  to  be  taken  over  by  the  partnership  at  the  Balance  Sheet 
figures  except  that  B  was  to  invest  in  the  partnership,  in  cash,  a  sum 
which,  after  making  the  adjustments  above  referred  to,  would  make  his 
capital  account  the  same  as  that  of  A. 

Draw  the  Balance  Sheet  of  the  A  and  B  partnership  on  July  i,  1905, 
giving  effect  to  the  foregoing  provisions.  % 

Solution. 

BALANCE  SHEET  OF  THE  FIRM  OF  A  AND  B,  AS  AT 

JULY  I,  1905. 


Assets. 

Cash $2,900 

Accounts  Receivable  $4,000 

Less  Reserve  for  bad 

debts 350  3,650 

Merchandise 4t55o 

Furniture i  ,000 


$13. TOO 


Liabilities. 

Accounts  Payable $3,500 

A.  (Capital  Account  $4,800 

B.  Capital  Account .  4,800  9,600 


$13, too 


m 


k* 

m 


Practical  Accounting  Problems. 
Question  17. 

(State  of  Washington  Elxamination,  June,  1906.) 

X  receives  from  his  customer,  Y,  a  note  in  settlement  of  his  account 
This  note  X  discounts  at  his  bank.    Draft  entries. 


Solution. 

X's  Books. 

Notes    receivable    $- 

To    Y    

for  his    . .   days'  note,  in  settlement  of 
account. 

Cash   Dr $- 

Proceeds    of    discounted    note,     received 
from  Y. 

Discount   Dr $- 

on  Y's  note  for  . .  days. 

To  Notes  Receivable  Discounted  Cr. 
for  Y's  note  discounted  at  the  bank. 

Y's  Books. 

X    $- 

To  Notes  Payable   

for  our  . .  days'  note  given  in  settlement  of 
our  account  up  to  date. 


$- 


Question  18. 

(State  of  Washington,  June,   1906.) 

X  and  Y  enter  into  partnership,  X's  capital  being  $20,000,  and  Y*« 
^15,000.  Capital  is  to  bear  interest  at  10%  per  annum;  profits  are  to  be 
divided  equally  between  the  parties.  The  profits  for  the  first  two  years 
(after  charging  interest  on  capital)  were: 

ist  year $6,000 

2d  year 7,5oo 

and  the  drawings  of  the  partners  (in  excess  of  salaries)  were: 

X  $1,500  first  year,  $1,750  second  year 

Y  1,200     "       "         1,500       " 

At  the  end  of  the  second  year,  Z  was  admitted  to  partnership,  and  put 
into  the  business  the  same  amount  of  capital  as  Y  had  in  the  business  at 
that  time,  and  on  the  same  conditions  as  to  interest  and  division  of  profits. 
The  profits  of  the  business  for  the  third  year  were  $12,000.  and  the 
partners'  drawings  in  excess  of  salary  were: 

X $1,750 

Y 1,600 

Z 1,500 

Construct  the  capital  accounts  of  the  partners  for  each  of  the  three 
years,  showing  the  balance  of  each  at  the  end  of  the  third  year. 

93 


Il 


Accounting  Problems  and  Solutions. 

Solution. 

X'S.  CAPITAL  ACCOUNT 


To  Withdrawals $1,500.00 

10%  Interest  on  same  .       150.00 
Balance  carried  down..  23,350.00 

$25,000.00 

To  Withdrawals $1,750.00 

10%  Interest  on  same.      175.00 
Balance  carried  down  .27,510.00 

$29,43500 

To  Withdrawals .$1,750.00 

10%  Interest  on  same .      1 7  5 . 00 
Balance  carried  down. 32,336.00 

$34,261.00 


By  Investment $20,000.00 

10%  Interest  on  same    2,000.00 
50%  of  profits  (ist  yr.)    3,000.00 

$25,000.00 

By  Bal.  brought  down.  .$23,350.00 
10%  Interest  on  same  2,335.00 
50%  of  profits  (2d  yr.)    3,750.00 

$29,435.00 

By  Bal.  brought  down.  .$27,510.00 
10%  Interest  on  same  2 , 7  5 1 .  00 
331%  of  profits'(3d  yr.)  4,000.00 

$34,261.00 
By  Bal.  brought  down   $32,336.00 


Y'S.  CAPITAL  ACCOUNT. 


To  Withdrawals $1,200.00 

10%  Interest  on  same .      1 20.00 
Balance  carried  down  .18,180.00 


$19,500.00 


To  Withdrawals $1,500.00 

10%  Interest  on  same .      150.00 
Balance  carried  down .  22,098.00 

$23,748.00 

To  Withdrawals $1,600.00 

10%  Interest  on  same .      1 60.00 
Balance  carried  down. 26,547.80 

$28,307.80 


By  Investment $15,000.00 

10%  Interest  on  same     1,500.00 
50%  of  profits  (ist  yr.)    3,000.00 

$19,500.00 

By  Bal.  brought  down.  .$18,180.00 
10%  Interest  on  same  1,818.00 
50%  of  profits  (2d  yr.)   3,750.00 

$23,748.00 

By  Bal.  brought  down.  .$22,098.00 
10%  Interest  on  same  2,209.80 
33i%  of  profits  (3d  yr.)  4,000.00 

$28,307.80 
By  Bal.  brought  down   $26,547.80 


Z'S  CAPITAL  ACCOUNT. 


To  Withdrawals $1,500.00 

10%  Interest  on  same      150.00 
Balance  carried  down .  26,657.80 

$28,307.80 


By  Investment $22,098.00 

io%Interest  on  same    2,209.80 
331%  of  profits 4,000.00 

$28,307.80 
By  Bal.  brought  down  $26,657.80 


Practical  Accounting  Problems. 

Quesrion   19. 

(New  York  Examination,  January,  1907.) 

a;J!!L  ^^^  ?i*  ^^^^^  ^^^*'   ^^?^  estate  agent,   for  the  year   looo, 


Titles  of  Accounts 


Cash 

Tenants 

Rents  accrued  . . . . 

Owners 

Clients 

Trade  creditors. . . . 

Fees 

Commissions 

Discounts 

Expenses 

Personal  drawings . 
Office  furniture . . . 
Capital 


Balances  Dec.  30,  1905 


$9,760.08 
1,060 


260 


$1,060 

2,500 

5.929 

444 


Transactions  in  1906 


500 


1,647.08 


$11,580.08  $11,580.08 


$137,797.62 

34.656 

34.788 

34.610 

100.934 

4.841.40 


$135,893.70 

34.788' 

34.656 

34,788 

102.070 

5.007.40 

125 

3. 118.92 

180 


Balances  Dec.  31,  1906 


1,000 
2,000 


$350,627.02  $350,627.02 


$11,664 
928r 


104 


1,000 

2,000 

500 


$9a8 

2,678 

6.909 

610 

125 
3.118.9a 

180 


1.647.08 


$16,196    $16,196 


94 


An  analysis  of  the  books  afforded  further  information  as  follows : 
annijfS^^     "^^^^  allowed  $71  for  repairs  made  by  them,  which  sum  was 
applied  on  account  of  rent  and  charged  to  owners. 

rr^H;f^?^"i.-iT^'?  charged  for  commissions  on  collections  $869.70,  trade 
creditors  bills  for  repairs  $3,566  and  insurance  $52.  *°^/"' 

on  salefli^r  ^  ^''^^'^'  insurance  $668,  coal  $906,  fees  $125,  commissions 

!Rc  J''rn^*'««1^.*'*"  presented  bills  for  office  supplies  $50,  insurance  written 
made  ^^5-40 ;  they  were  allowed  $180  for  discount  on  settlements 

wer?S^i!f'°"f  "^1  ^^^^''  collections,  insurance  written  and  coal  orders 
wrs^rtnrfer;ed't^Ex%"n"^^^  ^°""""^"  ^^^°"^*'  ^^  ^^^^^^^  ^<^--^ 

.mZ}"^  f^^^  transactions  were  as  follows:    Receipts—tenants,  $34,717. 
clients    $102,970,    commission    on    sales    $1,010.62.      Paymentt-^wners 

&^%^e%5T'"'''   '''^'   creditors*$4,66i.40,   perCaT'^rS 
Prepare  an  Articulation  Statement,  showing  in  each  account  the 
several  elements  of  debit  and  credit  and  giving  each  element  the  t?tie  of 
the  Arttculatmg  account  wherein  the  contra  credit  or  charge  appears! 

Solution. 

cnoi•^^"^^^""f  *  ^^^^.^'■.  ^  "^'^^  ^^«^*  °f  paper  (here  divided  to  economize 
aS^nf^/'/'K^*'  *^°"taining  perpendicular  columns.    The  captions  of^he 

SS?ron.'o?fh!  ^"^^^""i^  ^''  P^""^  '"^  *^  fi^«*  ^^l"'""  to  the  left  the 
captions  of  the  nominal  accounts  across  the  top  of  the  sheet. 

vnthfL^A^l^^T]  ^^«e*  »s ji^Vl^^  *"^^  ^^^'^  an<l  «^»-e<Jit  sides,  commencing 
S,in  hu^^'^  balance  of  the  ledger  account  at  the  beginning  if  the  period  • 
Icconn^  "^T  Y°-''  t^.s'^^et  from  left  to  right  all  debit  postings  t"  the 
account,   placed   m  their   appropriate  columns   to   "articulate   with   ^l 

is  Tea  t"witf"in^'  TiJ"  -^^^ 'aPP^!.«- :  The  cWSde  of  the  account 
IppropiLrco^^^^^^     ^'^'   '"'"''*^'   ^"^   *^   ^^^   ^""^^'^   ^^^--^    '^^   its 

95 


V  J. 


■ 


ii 


I 


Accounting  Problems  and  Solutions. 

When  all  of  the  accounts  are  analyzed  the  balances  of  the  nominal 
accounts  are  written  at  the  foot  of  the  columns. 

If  there  are  no  errors  the  footings  of  the  debit  columns  will  balance 
with  the  corresponding  column  on  the  credit  side. 


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Practical  Accounting  Problems, 
Questions  20-21. 

(New  York  Examination,  June,  1907.) 

(This  was  one  of  the  required  problems  and  was  rated  as  equivalent  to 
two  questions.) 

The  books  of  a  manufacturing  concern,  operating  under  a  system  of 
cost  accounts,  show  the  following  conditions  at  the  opening  of  the  fiscal 
year:  Raw  materials  in  storeroom,  $15,621.42;  factory  pay  roll,  applied 
and  distributed  but  not  paid,  2  days,  $831.78;  partly  manufactured  goods, 
at  prime  cost,  $63,888.44 ;  and  the  further  value  of  $8,037.17,  to  cover  fac- 
tory burden,  also  $12,074.92  to  cover  management  charges ;  finished  wares 
in  stock  at  total  cost  of  $21,656.01. 

The  financial  operations  during  the  ensuing  year  include:  purchases 
of  raw  materials,  $80,416.45;  factory  pay  rolls,  $125,793.90;  factory 
expense  including  wages  not  applied  to  cost  accounts,  $24,846;  manage- 
ment expenses,  $38,100;  interest  paid  on  loans,  $1,200;  income  from 
investments,  $5,004. 

The  manufacturing  operations  during  the  same  year  comprehend: 
raw  materials  issued  on  requisition  for  consumption,  $79,820.34;  wages 
applied  and  distributed  to  manufacturing  cost,  $120,250.40,  and  to  factory 
expenses,  $5,959-39  included  in  the  sum  stated  in  preceding  paragraph. 

Finished  goods  transferred  from  factory  to  warerooms,  at  prime 
cost,  covering  materials,  $78,542.58,  and  labor,  $ii8,333-75.  The  trading 
operations  during  the  same  year  comprehend:  cost  of  goods  sold, 
$251,949-90;  proceeds  from  goods  sold,  $302,339.88. 

At  the  close  of  the  year  the  partly  completed  goods  included,  in 
addition  to  prime  cost,  the  further  elements  of  value  to  cover  factory  and 
management  expenses  in  the  amounts  respectively  of  $8,439.02,  and 
$12,678.66,  and  factory  pay  roll  for  three  days  amounting  to  $1,247.67, 
which  has  been  applied  and  distributed,  though  not  due  till  the  close  of 
the  current  work. 

The  basis  of  the  apportionment  On  Cost  or  Overhead  Giarges  was  as 
follows:  factory  expense  20%  to  materials  and  80%  to  labor;  manage- 
ment expenses  30%  to  materials  and  70%  to  labor. 

The  transactions  of  the  previous  year  in  round  amounts  were  used  in 
calculating  the  current  year's  apportionments,  viz:  Materials,  $75,000; 
labor,  $115,000;  factory  expense,  $24,000;  management  expense,  $36,000. 

Open  the  general  ledger  accounts  that  control  the  cost  accounts ;  show 
the  operation  of  each  and  the  net  profits  resulting ;  also  calculate  the  per- 
centage to  be  added  to  each  $1  of  material  and  of  labor  to  give  the  total 
cost. 

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Accounting  Probkms  and  Solutions. 

Manufacturing  operations  during  the  year: 

Raw  Material  issued  on  requisitions $79, 820. 34 

Labor  applied  and  distributed  to   M'fg.   Cost...      120,250.40 

Year's  chcin^e  to  Prime  Cost $200,070,  74 

Overhead  charges  during  the  year: 

Factory  Expense $24,846.  00 

Management  Expense 38 ,  100 .  00 

Year's  Overhead  charges $62 ,  946 .  00 

6^,^46  . 

-31.46187%  percentage    to    be  added  to  prime  cost  to 

200,070.74                                  make  cost  of  productjon. 
Finished  Goods  during  the  year  at  prime  cost : 
Raw  Material $78 ,  542 .  58 

/  ^*^°^ "8.333-75  3^196.876.33        ' 

196,876.33  .    •    ^ 

-^ ^-98.40336%  percentage    of    year's    prime    cost    used  ia 

aoo ,  079 .  74      tw^-" ■-'  finished  goods  during  year. 

Therefore, 
$24 ,  846 .  00  X  98 .  40336%  -  24 ,  449 .  30  =-  Factory  Expense ,  and     ^ 

$38,100.00  X  98. 40336% -3 7, 49 1. 68 -Management  Expense.  _^  " 

Proof:     $196,876.33x31. 46187% -61, 940. 98,' 

and    24,449.30  +  37,491.68  also  =61,940.98. 
Hence ,  31 .  46187%  is  to  be  added  to  each  dollar  of  Labor  and  Material. 


i 


Solution. 
(Second  Form.) 


Assumingr  that  the  manufacturing  account  is  intended  to  be  exactly 
balanced  by  the  credits  of  product  finished  and  final  inventory,  the 
accounts  would  be  stated  as  below.  The  relation  between  prime  cost  and 
expenses  cannot  be  proved  for  either  product  finished  or  final  inventory. 
The  product  was  presumably  partly  made  in  the  previous  year  when  other 
percentages  for  indirect  expenses  may  have  been  used.  The  prime  cost  of 
the  final  inventory  is  not  ascertainable  separately  for  materials  and  labor, 
and  the  proportion  of  each  affects  the  indirect  expenses  chargeable  on 
the  basis  given.  The  figures  used  for  factory  expense  and  management 
expense  in  the  product  finished  are  therefore  merely  those  which  are 
found  to  be  uninventoried,  and  therefore  presumably  previously  dealt  with 
in  crediting  product  finished. 

If  in  the  final  paragraph,  "calculate  the  percentages  to  be  added" 
means  on  the  basis  of  the  figures  in  the  two  preceding  paragraphs,  the 
percentages  are  20.8  to  materials  and  38.609  (approx.)  to  labor. 


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Accounting  Problems  and  Solutions. 


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Practical  Accounting  Problems. 


Question  22. 
(New  York  Examination.  June,  1907.) 

.f.  ^'^  u  ?,?^  ^*.t  ^*^  Company,  a  close  corporation,  became  embarrassed 
through  the  failure  of  a  friendly  company  to  whom  they  had  given  their 
accommodation  paper,  and  a  trustee  was  appointed  February  i,  igo6.  to 
take  charge  of  their  affairs  for  the  benefit  of  the  creditors. 

The  condition  of  the  estate,  when  the  trustee  took  charge,  was  as 
follows:  *  * 

UABILITIES. 

Mortgage  on  real  estate,  maturing  Feb.  i,  1007....  $15,000.00 

Interest,  due  Feb.  i,  1906,  six  months  at  5% 375  00 

Taxes  due  21000 

Book  accounts  payable 3,9oo]oo 

Bills    payable     (including    accommodation    paperl 

$5600000)    57,400.00 

Capital   stock 40,000.00 

Surplus,  per  profit  and  loss  account 3,987.00 

$120,872.00 

ASSETS. 

Cash  on  hand  and  in  bank  $650  00 

Merchandise  ( stock  of  goods)   25,3io!oo 

Book    debts    (including    accommodation    account^ 

$56,000.00)    6080000 

Bills   receivable    ^[iia:©© 

Rea^  estate    30,000.00 

$120,872.00 

*u  ^"  °  j^^^  *°  complete  contracts  and  so  realize  to  the  best  advantage  on 
the  goods  in  stock,  the  trustee  purchased  merchandise  to  the  amount  of 
$50,000,  and  during  the  year  collected  $100,002  cash  from  sales. 

The  accommodation  account  was  settled  for  60%.  The  other  book  debts 
realized  $4,100,  and  the  bills  receivable  $3,600.    Balance  lost. 

The  accommodation  paper  was  settled  by  paying  $40,000  cash  and  re- 
newing $16,000,  entailing  legal  fees,  interest,  and  petty  expenses  of  $2,200. 

The  other  bills  payable,  the  accounts  payable,  taxes  and  interest  on 
mortgage  for  eighteen  months,  were  paid  in  course  of  settlement,  and  the 
principal  of  the  mortgage  was  paid  off  at  maturity. 

The  running  expenses  were  as  follows:  clerk  hire,  $1,500;  office  ex- 
penses, $1,000;  allowances  to  officers,  $3,000;  trustee's  commissions,  $3,000. 

On  Februaor  i,  1907,  the  trustee  surrendered  charge  of  the  company's 
offices  and  paid  over  the  cash  balances  in  his  hands.  On  said  date  there 
were  also  uncollected  book  debts  $2,000,  and  merchandise  stock  $8,000. 

^^I'^^Pr  ^  ^l^Jization  and  liquidation  account,  a  trustee's  cash  account 
and  a  balance  sheet  of  the  estate  at  termination  of  trust. 


104 


105 


i 


*t 


Accounting  Problems  and  Solutions, 

Solution. 

REALIZATION  AND   LIQUIDATION   ACCOUNT 

OF   THE 

FOX  &   DIX   COMPANY 
February  ist,  1907. 


// 


V/"^?'^ 
s'''^ 


Assets  to  be  Rbalized. 
Bills  Rec'ble. . .  $4, 1 1 2 
Accotints  Rec, 

(inc.  accom) . .  60,800 
Mdse.  (stock)...  25,310 
Real  Estate.        30,000  $120,223 

Liabilities  Liquidated. 
Taxes $      210 


Int.  (6  mos.). 
Bills  Payable 
Acc'ts  Pay... 
M'tge  on  R.E 


375 
41,400 

3.900 
15,000 


$60,885 


Liabilities    Not    Liquidated: 
Bills  Pay $16,000 

Supplementary  Charges: 
Pur'ses  &  Inv.  .$67,310 
Exp.  on  Accom     2,200 


Interest  (i  y'r). 
Clerk  Hire.  . . . 
Office  Exps . . . 
Allow 's  to  offi- 
cers       3,000 

Trust's  Comm .     3,000 


750 
1,500 
1,000 


$78,760 


$275,867 


Liabilities    to    be    Liquidated: 
Taxes  (due)... .     $210 
Interest  (due  for 

6  mos.) 375 

Bills  Payable 

(incl,  ace.)....  57,400 

Acc'ts.  Pay 3,900 

M'tge  on  R.E. .    15,000     $76,885 


Assets  Realized. 

Bills  Rec $  3,600 

Acc'ts  Rec 37.700 

Mdse.    (from 

stock) 17.310     $58,610 

Assets  Not  Realized: 
Mdse.  (bal.Inv)  $8,000 
Real  Estate.. . .  30,000    $38,000 

Supplementary  Credits: 

Cash  sales 100,002 

Acc'ts  Rec 2,000  $102, 00a 


Loss  on  Reali- 
zation   


370 


$275,867 


TRUSTEE'S  CASH   ACCOUNT 


Cash  Received. 

Amount  on  hand  $650 

Cash  Sales 100,002 

Bills  Receivable 3,600 

Accotmts  Receivable . .  37,700 


$141,952 


Cash  Paid. 

Taxes  (due)         

Bills  Payable        

Accounts  Payable.     . . 
Interest  on  M'tge    (18 

mos.) 

M'tge  on  R.E 

Purch's  of  Mdse 

Exp.  con.  with  Accom. 

Clerk  Hire 

Office  Expenses 

Allow's  to  Officers    . . . 

Trustee's  Comm . , 

Balance  with  Trustee. . 


$aio 

41,400 

3.900 

1,125 
15,000 

50,000 
a,  200 
1,500 
z,ooo 
3.000 
3,000 

19,617 

$141,95* 


106 


Practical  Accounting  Problems. 

BALANCE  SHEET 


Assets. 
Cash  with  Trustee. . . 
Accounts  Receivable 

Mdse.  (on  hand) 

Real  Estate       


$19,617 

2,000 

8,000 

30,000 


$59,617 


Liabilities. 

Cred.  on  Notes  Pay. . . .     $z 6,000 
Cap.  &  Surp  .  .$43,987 
Less  loss  on 

Realization..        370       43,617 

S59.617 


107 


1 


Accounting  Problems  and  Solutions, 


Question  23. 

(New  York  Elxamination,  June.  1907.) 

The  Montauk  Manufacturing  Company  becomes  insolvent,  and  the  re- 
ceiver appointed  to  wind  up  its  affairs  has  a  balance  sheet  prepared  from 
the  books,  which  shows  the  following  values: 

Balance  Sheet.  July  a,  1906,  Montauk  Manufacturing  Company 


Assets. 

Liabilities. 

Cash 

$1,402 

Bills  Payable . . . 

$30,000 

Bills  Rec $2,108 

AcctsRec 19,740 

21,848 

Ace' ts  Pay 

Interest  on  bond 

65.460 

Raw  material... $16, 2 00 
Partly  man'f 'd 

goods 5,400 

Fin.  wares.   . . .    13,900 
Consumable 

due  July,  1906.. 

Bonds,    issued   for 
factory   site 
and  buildiiig. 

Taxes,    wages 

2,700 
90,000 

supplies 300 

$3S.8oo 

etc.,  due 

2.500 

Factory  site  and 

/^ 

building 

90,000 

X 

Machinery $50,000 

X 

• 

Tools  &  Ap 7,000 

y^ 

Boats 8,000 

y/^ 

Horses  &  Tr'ks.     4,000 

/ 

Office  fix 600 

$69,600 

$218,650 
72,010 

Capital  Stock 

Defic'y  losses.. 

$190,660 
X  00,000 

^ 

$290,660 

$290,660 

The  machinery,  boats,  and  horses  and  trucks  are  pledged  on  chattel 
mortgage  to  secure  creditors  to  the  amount  of  $45,000,  $6,000,  and  $3,000 
respectively. 

The  mortgagees  of  the  machinery  agree  to  purchase  it  for  $30,000,  and 
the  other  mortgagees  agree  to  take  over  the  chattels  in  full  satisfaction, 
which  offers  are  believed  to  exceed  what  the  securities  would  realize  on 
forced  sale. 

It  is  estimated  that  raw  materials,  partly  manufactured,  and  finished 
wares  can  be  sold  for  $29,000,  while  the  consumable  supplies  are  not  in 
marketable  quantities,  that  the  tools  and  appliances  will  bring  $4,000,  and 
the  office  furniture  $500.  The  bills  receivable  are  all  good,  but  $1,640  of 
book  debts  are  uncollectible.  Customers'  notes  to  the  amount  of  $7,000 
have  been  discounted,  and  the  maker  of  one  of  said  notes  for  $340  has 
failed. 

Prepare  a  statement  of  affairs  and  a  deficiency  account. 


108 


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Accounting  Problems  and  Solutions, 


DEFICIENCY  ACCOUNT. 


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Capital  stock   . 
Deficiency.  . . . 

$100,000 
6,890 

Trade  losses . . . 

Shrinkages: 

$72,010 

/ 

Acc'ts  Rec. 

Mater'ls     and 
fin.  goods. . . 

Machinery 

Tools  and  Ap- 
pliances  

Boats 

Horses    and 
trucks 

Office  Fixtures 

$1,640 

6,800 

20,000 

3.000 
3,000 

1,000 
100 

34,540 

340 
$106,800 

Loss  through 
liability  in 
respect    of 
notes  disc'd 

— 

$106,890 

llV 


no 


1 


Practical  Accounting  Problems. 
Question  24, 

(State  of  Washington  Examination,  September,  1907.) 

On  December  31.  1906,  the  Trial  Balance  of  the  Mukilteo  Shipbuilding 
Company  was  as  follows: 


Real   estate    $300,000.00 

^^^[dings    158,000.00 

Equipment  847,500.00 

GoodwiU  50,000.00 

V?^"  ••• : 46,474-20 

Discount  earned   

Discount  allowed  5,600.14 

Interest—general  3,300.20 

Insurance 3.030.89 

Accounts  payable  

Depreciation  reserve  

Common  stock    

Preferred  stock 

Sales 

Accounts  receivable  156,028.75 

Inventory  of  raw  materials  and 
work  in  progress  Dec.  31,  1905,       184,567.39 

Operating,  maintenance  and  Gen- 
eral expenses  709,988.65 

Depreciation   25,000.00 

Purchases  691,98547 

Bond  interest  (one-half  year  to 
June  30,  1906) 2,000.00 

Taxes  accrued    (estimated) 

Bills  payable 

Accrued  interest  on  bills  payable. . 

First  mortgage  bonds  (4%) 

Surplus    


$10,120.37 


75,871.38 
58,272.00 

1,000,000.00 
500,000.00 

I,37M9I.I7 


5,300.00 

35,000.00 

900.27 

100,000.00 

26,520.50 


$3,183,475.69     $3,183,475.69 

The  inventory  of  raw  materials  and  work  in  progress  on  December  31. 
1906,  IS  valued  at  $309,062.05.  Before  the  books  are  finally  closed  it  is 
determined  to  (a)  make  a  reserve  of  i%%  of  $140,000  of  the  accounts 
receivable  to  provide  for  possible  bad  and  doubtful  accounts,  (b)  add 
?i,ooo  to  the  taxes  accrued  (estimated)  account,  (c)  carry  to  depreciation 
reserve  account  a  further  sum  of  $5,000.  Interest  on  the  bonds  to 
December  31st  is  also  to  be  provided  for. 

It  is  found  that  bona  fide  renewals  of  equipment,  costing  $17,500,  have 
be^  charged  to  operating  expense;  that  repairs  to  equipment,  amounting 
to  $0,000,  have  been  charged  to  equipment  account;  that  $1,500,  proceeds 

k-ii^r  d.™^?  "^7  ^^^^'  ^^^^  ^^^^  credited  to  sales  account;  and  that  a 
Diii  of  $1,560.25  for  raw  materials  received  and  used,  has  not  been  entered 
on  the  books.  These  items  are  to  be  taken  into  account  before  the  books 
are  closed.  Three  per  cent,  of  the  net  profits  for  the  year  is  then  to  be 
reserved  for  special  compensation  to  management. 

Make  journal  entries  to  give  effect  to  the  various  adjustments  above 
aescribed,  and  prepare  balance  sheet  and  profit  and  loss  account  as  they 
will  finally  appear. 

Ill 


I 


h 


Accounting  Problems  and  Solutions, 

Solution. 

JOURNAL  OF  THE  MUKILTEO  SHIPBUILDING  COMPANY. 

Adjustment  Entries. 

Equipment    $17,500.00 

To  Operating,  Maintenance  and  General  Expenses $17,500.00 

To  transfer  and  adjust  bona  fide  renewals 

of    equipment,    having    been    charged    to 

operating  expenses,  to  equipment  account. 

Operating,  Maintenance  and  General  Expenses $6,000.00 

To   Equipment    $6,000.00 

To  transfer  and  adjust  this  amount  charged 

to  equipment,  yet  constituting  only  repairs 

to  equipment,  but  no  increase. 

Sales  $1,500.00 

To  Equipment   $1,500.00 

To  transfer  this  sum  constituting  a  sale  of 

old  machinery,  charged  erroneously  among 

sales. 

Raw   Materials    ( purchases) $1,560.25 

To  Accounts  Payable   $1,560.25 

Constituting  a   charge   for   raw   materials 

bought,  but  which,  by  oversight,  have  not 

been  entered  on  the  books. 


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Practical  Accounting  Problems, 

Question  25. 
(State  of  Washington  Examination,  September,  1907.) 

A.  is  the  owner  of  a  business  with  property  valued  as  follows: 

Real  estate  and  buildings $100,000 

Machinery  and  tools 79,ooo 

Stock  in  trade 93,500 

A.,  B.,  C,  D.,  and  E.  organize  a  corporation  (F)  with  an  authorized 
capital  of  $350,000,  divided  into  3,500  shares  of  $100  each,  under  the 
following  conditions : 

A.  receives  2,725  fully  paid  shares  for  his  property  as  above. 

B.  subscribes  for  100  shares. 

C.  subscribes  for  100  shares. 

D.  subscribes  for  100  shares. 

E.  subscribes  for  125  shares. 

100  shares  are  placed  in  the  treasury  for  future  disposition,  and  SO 
shares  of  fully  paid  stock  are  given  to  each  incorporator  for  the  cash 
payment  of  10%  of  par  value,  in  consideration  of  services  in  the  organiza- 
tion of  the  company.  Each  incorporator  then  donates  30  shares  to  the 
company  for  sale  to  provide  working  capital. 

Draft  the  necessary  opening  entries  for  Corporation  p!,  giving  effect 
to  the  above  transactions,  and  prepare  resulting  trial  balance. 

Solution. 

JOURNAL  OF  THE  F.  COMPANY. 
THE    F    COMPANY 

A    CORPORATION    DULY    ORGANIZED    UNDER   THE   LAWS 

OF  THE  State  of  Washington,  with  an 
AUTHORIZED    CAPITAL 

OF 

$350,000.00, 

DIVIDED  INTO  3,500  SHARES  OF  $100  EACH. 

B $10,000.00 

C.     10,000.00 

^ ,         10,000.00 

E. 12,500.00 

To  subscription   $42,500.00 

For  their  respective  subscriptions  to  the 
capital  stock  of  the  Co.,  viz.:  B.,  C,  and 
D.,  100  shares  each,  and  E.,  125  shares. 

Subscription $42,500.00 

To  capital  stock 42,500.00 

For  425  shares  of  capital  stock  issued  to 
subscribers  in  accordance  with  subscrip- 
tion. 

Real  estate  and  buildings  $100,000.00 

Machinery  and  tools 79,000.00 

Stock  in  trade  93,500.oo 

To  A.  (Vendor)   272,500.00 

For  the  surrender  to  this  Co.,  by  vendor 
his  right,  title  and  interest  in  the  above 
mentioned  assets. 

A.  (Vendor) $272,500.00 

10  Capital  Stock   272,500  00 

For  2,725  shares  of  the  capital  stock, 
issued  to  vendor  in  payment  of  the 
assets  transferred  by  him  to  this  Co.  • 

IIS 


,1 


ii 


4i 


I   1! 


Accounting  Problems  and  Solutions, 

Organization  expenses  $22,500.00 

Cash  •••••■••••••••• 2,500.00 

1  o  Capital  Stock   25  000  00 

250    shares    of    capital    stock,    fully   paid 

up,  are  given  to  the  incorporators  (50  to 
each)  for  the  cash  payment  of  10%  of 
par  value,  in  consideration  of  services  in 
the  organization  of  the  company. 

Treasury  stock  $15,000.00 

To   Workmg   Capital    15,000.00 

ISO  shares  of  capital  stock  donated  by 
the  mcorporators  (each  30  shares)  to  the 
Co.,  for  sale  to  provide  working  capital. 

TRIAL  BALANCE  OF  THE  F.  COMPANY. 

^^^,  : ■ $2,500.00 

Stock  m  trade 93,500.oo 

Machmery  and  tools  79,000.00 

Real  estate  and  buildings  ioo,ooo!oo 

Treasury  stock  15,000.00 

Organization  expenses  22,'5oo!oo 

Subscribers  42,500.00 

B.  $10,000 

C.  10,000 

D.  10,000  V 

.  12,500 

J^^-^'r^.^^rV^-   "y^ $15,000.00 

Capital  stock  (issued) ___^____  340,000.00 

$355,000.00  $355,000.00 


!  i 


Question  26. 

(State  of  Washington  Examination,  September,  1907.) 

You  are  instructed  to  prepare  the  statement  of  affairs  of  John  Smith 
as  at  August  31,  1907.    Following  are  the  particulars: 

Accounts  payable   t^  qoo 

Bills  payable ...!.!!!  3500 

Loan  from  Wm.  Jones 15000 

Bank  overdraft  '  *  i|ooo 

Accounts  receivable  ....,'.,.....  2JB00 

Furniture  and  fixtures .1.'...',  500 

Real  estate  and  improvements  !.*.*!!*..*!.*  s  000 

Merchandise   ^Ioqq 

Smith  has  other  merchandise  to  the  amount  of  $5,000,  in  addition  to 
the  $7,000  above  stated,  $1,200  of  which  is  held  by  the  bank  as  security  for 
the  overdraft,  and  $3,800  by  Wm.  Jones  as  security  for  his  loan.  Jones 
also  holds  a  first  mortgage  on  the  real  estate  and  improvements.  Of  the 
accounts  receivable,  $300  are  considered  bad,  and  $250  are  expected  to 
realize  50%  of  their  face  value.  These  items  must  be  properly  dealt  with, 
and  the  deficiency  shown.  ^    ^     j  h 

u6 


Practical  Accounting  Problems. 


Wo       rt 
rt-^  O  to 

>  rt  6  0) 


117 


I    >l 


Ml 


Accounting  Problems  and  Solutions. 

Question  27. 
(New  York  Examination.  October.  1907.) 

An  issue  of  $250,000  fifty  year  bonds,  dated  July  i,  1904,  is  redeemable 
by  a  Sinking  Fund  into  which  annual  cash  installments  are  to  be  paid  by 
deposit  of  funds  in  a  Trust  Company  which  allows  interest  at  the  rate  of 
2%  per  annum,  credited  January  i  and  July  i.  Separate  books  are  to  be 
kept  solely  for  recording  the  sinking  fund  operations.  The  fund  so 
created  is  to  be  invested  in  interest-bearing  securities,  and  the  income 
therefrom  is  to  be  applied  to  the  reduction  of  the  succeeding  annual 
installments. 

On  July  I,  1905,  the  first  installment  of  $5,000  was  paid  into  the  fund 
and  on  the  same  day  the  following  investments  therefor  were  made : 

Two  5%  bonds  of  $1,000  each,  April  i  and  October  i,  at  par  and 
accrued  interest. 

Two  6%  bonds  of  $1,000  each,  May  i  and  November  i,  at  $110  and 
accrued  interest. 

On  July  I,  1906,  the  second  installment  was  duly  deposited  to  the 
credit  of  the  fund,  and  on  the  same  day  the  5%  bonds  purchased  in  the 
previous  year  were  sold  at  loi  and  accrued  interest,  and  other  invest- 
ments were  purchased  as  follows: 

Two  6%  bonds  of  the  same  issue  as  those  purchased  in  the  previous 
year  at  105  and  accrued  interest 

Five  4%  bonds  of  $1,000  each,  February  i  and  August  i,  at  98  and 
accrued  interest. 

The  income  from  all  investments  was  regularly  received  and  de- 
posited, and  the  value  of  the  6%  bonds  purchased  in  1905  was  written 
down  to  conform  to  the  value  of  the  bonds  of  the  same  issue  purchased 
in  1906  at  the  time  of  said  latter  purchase. 

Frame  journal  entries  and  write  up  the  Sinking  Fund  ledger  accounts 
showing  the  amount  of  the  cash  installments,  payable  on  July  i,  1906. 
and  July  i,  1907,  and  the  status  of  the  Sinking  Fund  at  said  dates. 

Solution. 

TltusT  Department. 

Journal 

July  I,  1905. 

Sinking  Fund  Cash   $5,000.00 

$5,000     deposited     with 
Banking  Department. 

To  Sinking  Fund  $5,000.00 

First  deposit  to  create 
the  fund. 

Sinking  Fund   Securities    $4,200.00 

2 — sfo  bonds    purchased 

at  100 $2,000 

3—6%  bonds    purchased 

at  no $2,200 

To  Sinking  Fund   Cash $4,200.00 

Check  drawn  on  banking 
department  in  payment 
of  bonds  purchased. 

118 


Practical  Accounting  Problems, 

Sinking    Fund    Income  $45.00 

Interest  accrued,  not 
due  on  bonds  purchased, 
2 — s%  April  I  to  July  i 

$25.00 

2 — 6%  May  i  to  July  i 

$20.00 

To  Sinking  Ftmd  Income  Cash $45-oo 

Reserve  to  be  deducted  from 
first  income  cash  received. 
October  i,  1905. 

Sinking  Fund  Income  Cash $50.00 

Cash  received  from  in- 
come. 

To  Sinking  Fund  Income $50.oq 

Six     months*     interest     on 
2—5%  bonds 
November  i,  1905. 

Sinking  Fund  Income  Cash $60.00 

Cash  received  from  in- 
come. 

"^^^.S^^^^^S  P""^  Income t $60.00 

Six  months*  interest  on 
2 — 6%  bonds. 
«.  , .       „  January  i,  1906. 

Sinking  Fund  Income  Cash $8.06 

Interest  credited  by  the 
banking  department  to 
the  cash  account 

To  Sinking  Fund  Income $8.06 

2%  interest  on  deposits, 
allowed  by  the  banking 
department. 
«...  April  I,  1906. 

Sinking  Fund  Income  Cash $50.00 

To  Sinking  Fund  Income $50.00 

Six  months*  interest  re- 
ceived on  2—5%  bonds. 
-.  . .  May  I,  1906. 

Sinking  Fund  Income  Cash  $60.00 

To    Sinking   Fund   Income $60.00 

Six  months*  interest  on 
2 — 6%  bonds. 

*,.  , .  July  h  1906. 

Sinking  Fund  Income  Cash  $9.16 

To  Sinking  Fund  Income $9116 

2%    interest    on    deposit 

balances,  credited  by  the 

banking    department    to 

cash. 

Sinking  Fund  Income   $192.22 

To  Sinking  Fund   $192.29 

Balance    of    income 
_,  ,  transferred  to  principal. 

Smkmg  Fund  Cash  $192.22 

To  Sinking  Fund  Income  Oish..  / $192.29 

Balance     transferred 

from    income    to    prin- 
cipal. 

Sinking  Fund  Cash  $4,807.78 

To  Sinking  Fund  $4307*23 

Second     installment     to 

redemption    fund,    viz : 

supposed    installment, 

$5,000.00,     less     income 
_.  , .                                        balance,  $192.22. 
Sinking  Fund  Cash  $2,oi2aoo 

119 

I 

I. 


Accounting  Problems  and  Solutions, 


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To  Sinking  Fund  Securities 

Sale  of  two  5%  bonds 
at  loi  and  interest. 

Sinking  Fund , 

profit  of  1%  on  above  sale. 

Sinking  Fund  Income  Cash  $25.00 

To  Sinking  Fund  Income 

Three  months'  accrued 
interest  on  2 — 5%  bonds, 
sold  April  to  July  ist. 

Sinking  Fund  Securities $7,000.00 

To  Sinking  Fund  Cash 

Purchase  of  2 — 6% 
bonds  at  105,  $2,100, 
5—4%  bonds  at  98, 
$4,900. 

Sinking  Fund  Income   $103.30 

To  Sinking  Fund  Income  Cash    . . . 
Two    months*    accrued 
interest    (May- July)    on 
6%  bonds,  $20.00. 
Five  months*  accrued  in- 
terest     (February- July) 
on  4%  bonds,  $83.30. 
August  I,  1906, 

Sinking  Fund  Income  Cash $100.00 

To  Sinking  Fund  Income 

Six  months'  interest  col- 
lected on  5—4%  bonds. 
November  i,  1906. 

Sinking  Fund  Income  Cash $120.00 

To  Sinking  Fund  Income 

Six  months*  interest  col- 
lected on  4—6%  bonds. 
January  i,  1907. 

Sinking  Fund  Income  Cash $8.72 

To  Sinking  Fund  Income 

2%  interest  on  deposit 
balance  allowed  by 
banking  department. 

Sinking  Fund  Income  Cash  $220.00 

To  Sinking  Fund  Income 

February  i,  1907,  interest 
5 — 4%  bonds,  $100,  May 
I,     1907,     interest    on 
4 — 6%  bonds,  $120. 
July  I,  1907. 

Sinking  Fund $100.00 

To   Sinking  Fund  Securities 

Writing  down  two 
bonds  from  no  to  105. 

Sinking  Fund  Income  Cash  $10.90 

To  Sinking  Fund  Income 

Interest  on  deposit  bal- 
ances at  2%. 

Sinking  Fund  Income $381.32 

To  Sinking  Fund  

Transfer  of  income  bal- 
ance. 

Sinking  Fund  Cash  $381.32 

To  Sinking  Fund  Income  (Tash 

Transfer  of  cash  bal- 
ance funds. 

Sinking  Fund  Cash $4,618.68 

To  Sinking  Fund 

Third  installment, 
$5,000.00,  less  income 
balance,  $381.32. 

'  120 


.$2,000.00 
...$20.00 
...$25.00 


.$7,000.00 


.$103.30 


.$100.00 


.$120.00 


.$8.72 


.$220.00 


$100.00 


.$10.90 


$381.32 


$381.32 


.$4,618.68 


Practical  Accounting  Problems. 


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Question  28. 

(Problem  set  in  the  Final  ExaminaH^^^  Society  of  Account- 

ants  and  Auditors  in  London,  England,  June,  1907.) 

DeImh^^7''fjF'v^''^  ^^^^'^  ^"^"^  *>  ^°°^  °^  *^^  A.  B.  MiUs  as  at 
^ecemoer  31,  1906.     You  are  requested  to  prepare  from  them  a  Trial 

L^S  AccoJft^°.hl^^^^^^      "^"^^^f '  ^  TradingVcount.  and  r^rofit  and 
Shelt^^ThT^JodTf^^^^^^^^      ^'  manufacture.     Prepare  also  a  Balance 

J^lS^^"'^;: ^5.000 

Wages ; ^^'^50 

Discounts  received  '..'.'. ^!'5°° 

Dyeing ^'5°° 

Power,  Light  and  Heat*  .'.*.■.'.'.*".*.'.* "'f °° 

Boxes  and  Cases. . .  ^*  ^ 

Repairs .*  .* .'  [ ; ^  '^1° 

Sundry  Expenses  (Mills) '.'.'.'.'.'.'. ,  "fi^ 

Insurance '     ° 

Salaries ^^^ 

Taxes '.'.'.'.'.'.['.'.[[[ *'^°° 

Depreciation '^'° 

Advertising ^^^ 

TraveUng  Expenses  ...*..'  .'.■.*.*; .' f'^J^ 

Returns. ......  ^'"S 

Commissions. ...!.'.';.'.'.' ^'2°° 

Discounts  Allowed ^'^^ 

Interest  on  Loans  .              '*^° 

Cash  at  Bank  and  in  hand'. '. '.'.'.'. '.'.'. '.'..'.'.'. j.  o6c 

BiUs  Payable Jl'°°5 

Sundry  Debtors  .             37.Soo 

Sundry  Creditors.;:: ^f'5°° 

Fixtures,  Fittings.  Office : ; :  .* : : : : : : ::::::; j'^f ° 

Capital "^''So 

Machinery  and  Plant.: :::::::::: 2f  •!?. 

BiUs  Receivable fl'^^S 

30,400 


%\ 


124 


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Accounting  Problems  and  Solutions. 


$81,350.00 
3,500.00 


Solubon. 


TRIAL  BALANCE  OF  THE  A.  B.  MILLS.  DECEMBER  31.   1906. 


Cash  at  Banic  and  in  hand $14,065.00 

Bills  Receivable 38,400.00 

Machinery  and  Plant 65,92 5.00 

Fixtures,  etc 4,750.00 

Yam  (used) 25,000.00 

Sales 

Wages 22,500.00 

Discounts  received 

Dyeing 12,500.00 

Power,  Light  and  Heat 3,1 25.00 

Boxes  and  Cases 1,250.00 

Repairs 685.00 

Sundry  Expense  (Mills) 1,060.00 

Insurance iSS-o^ 

Salaries 3,500.00 

Taxes 310.00 

Depreciation 42500 

Advertising 1,350.00 

Traveling  Expenses 1,125.00 

Returns 1,000.00 

Commissions 1,875.00 

Discounts  Allowed 440.00 

Interest  on  Loans 410.00 

Bills  Payable 

Sundry  Creditors 

Sundry  Debtors 22,500.00 

Capital 

$221,350.00 


37,500.00 
6,350.00 

93.75000 
$331,350.00 


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Practical  Accounting  Problems. 

Question  29. 

(Problem  set  in  the  Final  Examination  of  the  Society  of  Account- 
ants and  Auditors  in  London,  England,  December,  1907.) 
Diogenes  Brown  and  Eusebius  Robinson,  having  separate  businesses 
agree  to  a  joint  venture  in  a  cargo  of  goods  to  a  newly-established  Colony, 
under  the  following  arrangement: 

Each  supplies  $5,000  of  his  own  goods,  beside  which  they  jointly 
purchase  $10,000  (net)  from  other  parties.  This  latter  sum  is  paid  by 
V  ;V.  °  receives  all  the  goods  into  his  own  warehouse,  pacl^them. 
puts  them  on  board  ship,  and  pays  all  the  necessary  outgoings.  For  this 
he  makes  a  charge  of  $50,  and  is  entitled  to  interest  at  5  Zer  cent,  per 
annum  for  Cash-out-of-pocket,  until  the  realization.  The  out-of-poc£t 
^^P^^lf^^'-  freight  and  Charges,  $175;  Insurance,  $125;  and  Packing 

fif™  'i^^Vi,  I"^  ^"^t?^  Y®  ^¥  HP^^  ^"^^^^  ^<^r  $25,000  and  at  the  end  0I 
three  months  from  the  start  of  the  transaction  a  remittance,  less  charges 
for  Landing  Warehousing,  Sale  Charges  and  Commissions,  etc.,  $412.25, 
IS  received  by  E  R.  Journalize  these  transactions,  and  rai^e  pro^r 
Joint  Adventtire  Accounts  in  the  books  of  both  parties,  showing  the  prSfit 
made,  which  is  to  be  equally  divided.  5     «  h*""" 

Solution. 

(Journal  op  Eusebius  Robinson.) 

•^°'Fnr^?of  7''''!  ""^^ i $20,385.00 

I'or  total  cost  of  a  cargo  of 

^oods  shipped  to  — on 

joint  account   of  myself  and 

Diogenes  Brown.  ' 

To  Merchandise  (Sales) $5,000.00 

For  a  lot  of  goods  which 
I  supplied. 

Diogenes  Brown 5,000.00 

For  a  lot  of  goods  sup- 
lied  by  him. 

Cash 10,335.00 

For  additional  purchases 
(paid  by  me  $10,000)  and 
charges  on  the  shipment, 
viz.:  Freight,  etc.,  $175; 
Insurance,  $125;  and 
Packing  Cases,  $35. 

Commission 50.00 

For   handling   the   ship- 
-,  ment. 

Net  proceeds  received* this  day 

for  our  joint  adventure  with 
D.  B. 

To  Joint  Adventure  to $24,587.75 

Proceeds  of  sale   of  our 
shipment  in  Co.  with  D. 
-  .  Brown. 

Joint  Adventure  to $120.10 

For  interest  charges  on  money 
advanced. 

To  Interest  Gained iaQ.19 

5%  on  $10,335  advanced 
on  Joint  Adventure  for 

T  .  three  months. 

Joint  Adventure  to $4  07  ?  1:6 

For  profit  made  on  the  venture 
in  Co.  with  D.  B. 

To  Diogenes  Brown 2,036.78 

For  his  one-half  share  in 
the  profits. 
Profit  and  Loss  Account.  .      2,036  78 
For    my    share    in    the 
profits. 


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JOURNAL    OF     DIOGENES     BROWN. 

Joint  Adventure  to $s,ooo.oo 

For  my  share  of  prime  cost  in 
Co.  with  E.  Robinson,  who 
manages  the  adventure. 

To  Merchandise  (Sales) $5,000.00 

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I7.036.78 


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Representing  my  original 
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share  of  profits. 


7,036.78 


Question  30. 

(Problem  set  in  the  Intermediate  Examination  of  the  Society  of 
Accountants  and  Auditors  in  London,  England,  December,  1907.) 

You  are  required  to  make  up  from  the  following  particulars  the 
Capital  Accounts  of  each  partner  in  the  firm  of  A,  B  and  C  for  the  six 
months  ending  December  31,  igo6: 

Profits  are  divisible  in  the  proportions  A,  4/10;  B,  3/10;  C,  3/10. 

Interest  at  4  per  cent,  per  annum  to  be  credited  on  Capital. 

The  net  profits  before  adjustment  of  interest  are  $24,380. 

The  partners  have  drawn  on  the  last  day  of  each  month.  A.  $500: 
B,  $375;  C,  $375.  '  -.  *5U". 

Capital  at  June  30th,  1906:   A,  $94,500;  B,  $52,500;   C,  $43,750. 

State  also  if  in  your  view  it  is  necessary  to  charge  interest  on  drawings 
and  give  reasons. 


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Question  31. 

Problem  set  in  the  Intermediate  Examination  of  The  Society  of 
Accountants  and  Auditors,  London,  England,  December,  1907. 

The  firm  of  X  and  Z  suspend  payment,  and  you  are  supplied  with 
the  following  particulars  from  which  to  prepare  a  statement  of  the  firm's 
affairs  and  a  deficiency  account: 

Assets. 

Cash  in  hand  $175.00 

Accounts   receivable    4,100.00 

Inventory  (mdse.)   5,250.00 

Machinery  and  plant 2,800.00 

Trade  fixtures  250.00 

Land  and  buildings  36,000.00 


$48»575.oo 


Liabilities. 

Loans  on  mortgage  $25,000.00 

Loans  payable  5,000.00 

Accounts  payable  14,100.00 


$44,100.00 


Capital. 

X's  account,  balance  on  January  i,  1907  $4,100.00 
Net  loss   2,000.00 


a 

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Z's  account,  balance  on  January  i,  1907  $3,375.00 
Net  loss   1,000.00 


$2,100.00 


$2,375.00 

$48,575.00- 

The  partners'  drawings  have  each  been  at  the  rate  of  $1,250  per  annum 
and  have  been  paid  in  cash  and  charged  as  a  working  expense. 
The  assets  have  to  be  depreciated  as  follows: 

Land  and  buildings,  25  per  cent. 
Inventory  (mdse.),  15  per  cent. 
Machinery,  10  per  cent. 

The  Accounts  Receivable  represent:  Good,  $2,000;  Doubtful,  $1,500^ 
and  Bad,  $600.  Value  the  Good  Debts  at  10  per  cent,  off,  the  Doubtful  at 
half  their  nominal  amount,  and  the  Bad  at  nil.  The  partners  have  no 
separate  liabilities,  and  Z  alone  has  assets  represented  by  household 
furniture,  $250. 

Prepare  the  required  accounts. 

136 


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VI. 


Accounting  Problems  and  Solutions, 


Practical  Accounting  Problems. 


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* »i(iii(  II   » 


Accounting  Problems  and  Solutions. 


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Practical  Accounting  Problems. 


I-  1-04  Capital    ... 
12-31-04  Interest    .. 


Solution. 
(Second  Form.) 

Total  A  B  C  D 

$24,500.00    $7,500.00    $4,000.00    $6,200.00    $6,800.00 
1,225.00        375-00        200.00        310.00        340.00 


Loss 


$25,725.00    $7,875.00    $4,200.00    $6,510.00    $7,140.00 
1,825.00        456.25        456.25        456.25        456.25 


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Drawings 

I-  1-05  Capital   ., 

12-31-05  Interest    . 

Profit    ... 


Drawings 

I-  1-06  Capital   .. 

12-31-06  Interest    . 

Profits  ... 


$23,900.00    $7,418.75    $3,743.75    $6,053.75    $6,683.75 
3,950.00      1,250.00        800.00        900.00      1,000.00 


$19,950.00  $6,168.75  $2,943.75  $5,153.75  $5,683.75 

997.51    308.44    147.19    257.69    284.19 

5,002.49   1,250.63   1,250.62   1,250.62   1,250.62 


$25,950.00    $7,727.82    $4,341.56    $6,662.06    $7,218.56 
4,400.00      1,300.00        600.00        950.00      1,550.00 


$21,550.00  $6,427.82  $3,741.56  $5,712.06  $5,668.56 
i»077.50  321.39  187.08  285.60  283.43 
7,922.50     1,980.62      1,980.62      1,980.63      1,980.63 


$30,550.00    $8,729.83    $5,909.26    $7,978.29    $7,932.62 
Drawings  ..        4,050.00      1,150.00        650.00      1,050.00      1,200.00 


8  : 
^  : 

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CO 


I-  1-07  Capital    ....    $26,500.00    $7,579.83    $5,259.26    $6,928.29    $6,732.62 

* 

PROOF: 

Original   Capital    . . . .» $24,500.00 

Net  Profits  three  years  14,400.00 


A's  Total  Drawings  $3,700.00 

B's  Total  Drawings  2,050.00 

Cs  Total  Drawings 2,900.00 

D*s  Total  Drawings  3,750.00 


$38,900.00 


12,400.00 


$26,500.00 


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■1 

Accounting  Problems  and  Solutions. 


Question  33. 
(Michigan  Elxamination,  June.  1908.) 

The  Western  Grain  Co.  has  this  day  been  incorporated  under  the  Laws 
of  this  State  by  the  following  incorporators :  C.  H.  Benton,  J.  W.  Walters* 
F.  Rowland,  and  A.  B.  Miller,  all  of  this  city,  with  an  authorized  capital  of 
$25,000.00,  divided  into  250  shares  of  $100.00  each. 

The  purpose  of  this  corporation  is  to  buy  and  sell  all  kinds  of  grain, 
and  the  subscriptions  to  the  stock  of  the  Company  are  as  follows : 

C  H.  Benton  60  shares,  J.  W.  Walters  60  shares,  F.  Rowland  100 
shares,  and  A.  B.  Miller  30  shares. 

Pursuant  to  an  agreement  between  the  firms  of  Benton  and  Walters 
and  F.  Rowland,  and  the  Western  Grain  Co.,  the  former  two  individual 
concerns  agree  to  sell  to  the  latter  all  their  assets,  consisting  of  stock 
of  Merchandise,  Real  Estate,  Accounts  and  Notes  Receivable,  Goodwill, 
etc.,  etc.,  in  consideration  of  the  assumption  by  the  Western  Grain  Co., 
of  all  the  liabilities  of  the  two  individual  concerns  as  well  as  for  the 
payment  in  capital  stock  of  the  Company  for  the  balance  which  the 
assets  may  exceed  the  liabilities.  The  Balance-sheet  of  each  individual 
concern,  given  on  page  147,  is  taken  as  exhibiting  the  exact  value  of  each 
plant. 

The  Goodwill  of  Benton  and  Walters  is  valued  at  $1,500.00,  while 
that  of  F.  Rowland  is  valued  at  $2,000.00. 

To  enable  the  corporation  to  carry  out  this  agreement  the  original 
subscriptions  of  Benton,  Walters  and  Rowland  are  therefore  amended 
as  follows: 

C.  H.  Benton  subscribing  20  shares,  Walters  20  shares,  and  Rowland 
27  shares.  A.  B.  Miller  pays  in  cash  for  his  subscription,  and  Benton, 
Walters  and  Rowland  donate  each  5  shares  of  the  capital  stock  of  the 
Company  to  provide  a  reserve  for  contingencies. 

Draft  the  necessary  journal  entries  for  the  opening  of  the  corporation 
books  and  all  the  other  facts  mentioned  above,  and  create  the  ledger 
accounts. 


146 


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Accounting  Problems  and  Solutions. 

Solution. 

THE    WESTERN    GRAIN    COMPANY 
incorporated  under  the  laws  of  the 

State  op  Michigan  with  an 
AUTHORIZED    CAPITAL 

OP 

$35,000.00, 

divided  into  250  SHARES  OP  $IOO  BACH. 

Subscribers: 

C.  H.  Benton $6,000.00 

J.  W.  Walters 6,000.00 

F.  Rowland 10,000.00 

A.  B.  Miller 3,000.00 

To  Subscription $35,000.00 

for  their  respective  subscriptions  to  the  capital  stock  of  the 
Co.,  as  follows:  C.  H.  Benton  and  J.  W.  Walters,  60  shares  each; 
F.  Rowland,  100  shares;  and  A.  B.  Miller,  30  shares. 

Plant  and  Sundry  Assets $34,600.00 

To  Vendors $24,600.00 

for  the  surrender  to  this  Co.,  of  their  right,  title  and  interest  in 
all  of  the  assets  of  their  respective  firms,  including  the  Goodwill. 

Subscription |$i5,3oo.oo 

To  C.  H.  Benton $4,000.00 

J.  W.  Walters 4,000.00 

F.  Rowland 7,300.00 

To  enable  the  Co.  to  purchase  the  assets  of  the  vendors  the 
original  subscriptions  are  amended  to  read  as  follows:  C.  H. 
Benton,  20  shares;  J.  W.  Walters,  30  shares;  F.  Rowland, 
37   shares. 


Vendors $9,300.00 

To  Simdry  Liabilities $9,300.00 

for  the  asstmiption  by  this  Co.  of  all  the  liabilities  on  open 
accounts  and  notes  payable,  as  part  consideration  for  assets 
acquired. 

148 


Practical  Accounting  Problems. 

Vendors trf-  -.««  «« 

♦15,300.00 

To  Capital  Stock tr  r  ,««  ^^ 

r  , ♦15,300.00 

for  153  shares  of  the  capital  stock  of  this  Co.,  issued  to  vendors  in 
pa3mient  of  balance  of  consideration  for  assets  bought  as  per 
bill  of  sale  dated , 

Subscription $9,700.00 

To  Capital  Stock •„  _^  ^^ 

,  ,  ♦9f7oO'Oo 

for  97  shares  of  capital  stock  issued  to  the  subscribers  in  ac- 
cordance with  amended  subscription,  viz:— C.  H.  Benton  and 
J.  W.  Walters,  30  shares  each;  F.  Rowland,  37  shares,  and 
A.  B.  Miller,  30  shares. 


Notes  Receivable t?  rnft  «« 

.  _  ♦3,100.00 

Accounts  Receivable 9,950.00 

Merchandise  (Inventory) 3,127.25 

Furniture  and  Fixtures '595  00 

Real  Estate "  *  5,150.00 

Unexpired  Insurance *  68.7c 

Goodwill *       ,  -    "«^ 

3,500.00 

To  Plant  and  Sundry  Assets $34,600.00 

for  the  purpose  of  placing  the  respective  assets,   under  appro- 
priate headings,  on  the  books  of  the  Co. 

Sundry  Liabilities $9,300.00 

To  Notes  Payable $c  410 

Accounts  Payable ..............*.  .* .' .'  .*  3  580  67 

Notes  Receivable  Discounted »'L«  J. 

X         .■•  -  1,300.00 

for  the   purpose   of  placing  the  respective  Habihties.   under 
appropriate  headings,  on  the  books  of  the  Co. 

Cash *, 

$3,000.00 

To  A.  B.  Miller «,«««,.« 

93iOOO.OO 

cash  pajrment  for  subscription  to  the  stock  of  the  Co. 

Treasury  Stock $1,500.00 

To  Reserve  for  Contingencies $1,500.00 

Benton,  Walters  and  Rowland  donate  each  five  shares  of  the 
capital  stock  of  the  Co.,  issued  to  them,  to  serve  as  a  Reserve  for 
Contingencies. 

149 


Accounting  Problems  and  Solutions, 


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TRIAL  BALANCE: 

^^sh $3,000.00 

Notes  Receivable 3,100.00 

Real  Estate 5,159.00 

Furniture  and  Fixtures 695.00 

Merchandise  (Inventory) 2,127.25 

Insurance  (Unexpired) 68.75 

Goodwill 3,500.00 

Treasury  Stock 1,500.00 

Notes  Payable 

Reserve  for  Contingencies 

Notes  Receivable  Discounted 

Capital  Stock 

Accounts  Receivable 9,950.00 

C.  H.  Benton 2,000.00 

J.  W.  Walters 2,000.00 

F.  Rowland 2,700.00 

Accounts  Payable 

S3  5. 800.00 


$5,410.33 
1,500.00 
1,300.00 

25,000.00 


2,589.67 
$35,800.00 


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II 


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Accounting  Problems  and  Solutions, 


Question  34. 
(Michigan  Elxamination,  June,  1908.) 

A.  Wells,  a  manufacturer  of  novelties,  is  joined  by  I.  M.  Anxious 
in  partnership  upon  the  following  terms: 

A.  Wells  is  to  receive  a  monthly  salary  of  $ioo  for  the  first  year, 
which  shall  be  a  first  charge  upon  the  profit  after  providing  for  the 
usual  business  expenses  and  before  reckoning  3  per  cent  upon  the 
Partners*  Capital.  In  the  event  of  such  profit  during  the  first  year,  or 
any  subsequent  year,  not  exceeding  6  per  cent,  of  the  total  Capital  (after 
payment  of  the  salary),  this  salary  shall  be  reduced  to  $75  per  month 
the  following  year,  and  remain  so  tmtil  the  yearly  profit  advances  to 
more  than  6  per  cent,  when  such  salary  shall  return  to  $ioa  commenc- 
ing the  year  succeeding  the  one  showing  the  required  increase  of  profit. 
Should  the  profit  in  any  one  year  amount  to  more. than  10  per  cent 
upon  Capital,  A.  Wells  shall  be  entitled  (in  addition  to  the  salary  he 
received  for  that  year)  to  a  bonus  of  33  1-3  per  cent,  upon  any  sum  in 
excess  up  to  $1,500,  and  25  per  cent  upon  any  further  excess;  and  his 
bonus  shall  be  a  charge  against  profit  before  allotting  the  interest  at 
3  per  cent,  upon  capital.  Any  profit  then  remaining  shall  be  equally 
divided. 

From  the  following  particulars  construct  separate  capital  accounts  for 
each  partner  for  five  years.  Starting  capital:  A.  Wells  $6,000,  I.  M. 
Anxious  $5,000. 

Profit  before  deducting  salary,  interest  or  bonus : 

1st  year   $1,750.00 

2d  year  1,800.00 

3d  year   4,250.00 

4th  year    5,000.00 

5th  year  5»50o.oo 

No  drawings  on  account    Distribution  of  profits  when  ascertained. 


154 


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Accounting  Problems  and  Solutions. 


Solution. 
(Second  Form.) 


TIME. 

PARTIC- 
ULARS. 

TOTAL. 

ANXIOUS. 

WELLS. 

RE- 
MARKS 

1900 

January        i 

Capital 

$11,000.00 

$5,000.00 

$6,000.00 

euo 

December  31 

Salary 

1,200.00 

1,200.00 

.S 

31 

Interest 

330.00 

150.00 

180.00 

-s 

31 

Profits 

220.00 

110.00 

110.00 

5< 

1901 

a 

January       i 

Capital 

$12,750.00 

$5,260.00 

$7,490.00 

0 

December  31 

Salary 

900.00 

900.00 

31 

Interest 

382.50 

157.80 

224.70 

a 

31 

Profits 

517-50 

258-75 

258.75 

JO 

w 

8 

1902 

January       1 
December  31 

Capital 

$14,550.00 

S5.676.55 

$8,873.45 

a 

Salary 

900.00 

900.00 

Cq 

31 

Interest 

436-50 

170.30 

266.20 

Xi 

..         3, 

Bonus 

598.75 

598.75 

>. 

31 

Profits 
Capital 

2,314.75 

1.157-38 

1. 157-37 

1: 

(11 

1903 
January       i 

December  3 1 

$18,800.00 

$7,004.23 

$11,795-77 

Salary 

i,aoo.oo 

1,200.00 

0 

31 

Interest 

564.00 

210.13 

353.87 

TJ 

31 

Bonus 

605.00 

605.00 

1,  i 

Profits 

2,631 .00 

1,315.50 

1,315.50 

^ 

1904 

January       i 
Decemoer  31 

Capital 
Salary 

$23,800.00 

$8,529.86 

$15,270.14 

0  c 

1,200.00 

1,200.00 

tj* 

31 
31 

Interest 
Bonus 

714.00 
605.00 

255.90 

458.10 
605.00 

31 

Profits 

2,981 .00 

1,490.50 

1,490.50 

-i 

$29,300.00 

$10,276.26 

$19,023.74 

? 
0 

PROOF: 

Original  Capital  invested 

Net  Business  Profits  for  the  five  years: 

(1)  $1,750.00 
(3)     1,800.00 

(3)  4.250-00 

(4)  5,000.00 

(5)  5,500.00 


$11,000.00 


18,300.00      $39,300.00 


Practical  Accounting  Problems. 
Question  35. 

(This  problem  so  well  illustrates  the  handling  of  reserves  for  insurance, 
that,  although  it  is  not  taken  from  a  C.  P.  A. 
examination,  it  is  included  here.) 

The  William  Green  Company,  retail  and  wholesale  grocers,  on  January 
I,  1902,  decided  that  instead  of  paying  premiums  for  fire  insurance  on  the 
stock  carried  at  its  fifty  retail  stores,  and  also  at  the  warehouse,  it  will 
set  aside  out  of  the  profits  of  each  year  an  amount  equal  to  the  premiums 
which  would  have  been  paid  to  the  Fire  Insurance  Companies,  and  will 
deposit  this  amount  on  January  ist  of  each  year  with  Trust  Companies  at 
3  per  cent,  interest. 

The  premium  paid  in  1901  averaged  $75-00  on  each  store  and  $600.00 
on  the  warehouse.  On  July  i,  1902,  they  opened  ten  new  stores ;  on  Janu- 
ary I,  1903,  they  opened  five  additional  stores;  on  January  i,  1904,  they 
opened  ten  new  stores;  all  of  about  the  same  size  and  carrying  about 
the  same  stock. 

Figure  the  insurance  at  the  same  rate  for  the  years  1902,  1903,  and  1904. 
Show  the  accounts  which  should  be  opened  on  the  books  of  the  William 
Green  Company,  to  take  care  of  this  new  feature  and  the  condition  of 
these  accounts  on  January  i,  1905. 


Solution. 
1902. 

Dec.  31,  Profit  and  Loss,  Dr 

To  Reserve  for  Insurance 

50  stores,  I  yr.  @  $75.00 $3,750 

10  stores,  Vz  yr.  @  $37.50 375 

I  warehouse 600 


$4,725-00 


$4,725.00 


$4,725 


1903. 

Jan.  I,  Insurance  Fund,  Dr 

To  Cash 

Investment  at  3%  interest  with. . . 

the bank  as  an  insurance 

fund  in  lieu  of  premiums  hereto- 
fore paid  to  Insurance  companies 

Dec.  31,  Profit  &  Loss,  Dr 

To  Reserve  for  Insurance 

65  stores  I  yr.  @  $75 $4,875 

I  warehouse  600 


$4,72500 


$4,725.00 


$5,475-00 


$4,725-00 


$5475 


160 


161 


R'lH 

B^H^^^^H^' 

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i:      r 


Accounting  Problems  and  Solutions, 

Dec  31,   Insurance   Fund,   Dr $i4i-75 

To  Reserve  for  Insurance $141.75 

37c  interest  on  $4,725,  at bank 

1904. 

Jan.  I,  Insurance  Fund,  Dr $5.47b-oo 

To  Cash   $5,475.00 

Investment  of  1903  reserve  at  3% 

Dec.  31,  Profit  &  Loss,  Dr $6,225.00 

To  Reserve  for  Insurance $6,225.00 

75  stores,  I  yr.,  @  $75 $5,625 

I   warehouse 600 

$6,225 

Dec.  31,  Insurance  Fund,  Dr $310.25 

To  Reserve  for  Insurance $310.25 

3%  interest  on  deposit  of  $10,341.75. 

1905. 

Jan.  I,  Insurance  Fund,  Dr $6,225.00 

To  Cash $6,225.00 

Investment  of  1904  reserve  @  3%. 

Reserve  for  Insurance. 
1902. 

Dec.  31,  By  Profit  &  Loss $4,725.00 

1903. 
Dec.  31,  By  Profit  &  Loss $5,475.00 

Dec.  31,  By  Interest  on  Insurance  Fund 141-75 

1904- 

Dec.  31,  By  Profit  &  Loss 6,225.00 

Dec.  31,  By  Interest  on  Insurance  Fund 310-25 

Insurance  Fund  (deposited  in  Trust  Co.). 
1903. 

Jm.  I.    To  Cash  $4,725.00 

Dec.  31.  To  Interest  on  Ins.  Fund i4i-75 

1904- 

Jan.  I.    To  Cash $5»475.oo 

Dec  31,  by  Int  on  Ins.  Fund 310.25 

1905. 
Jan.  I.    To  Cash  $6,225.00 

160 


« 


Practical  Accounting  Problems, 

Notes  on  Problems. 
Problem  1. 

The  solution  of  this  problem  is  based  on  a  solution  given  in  Lisle's 
^Accountmg  in  Theory  and  Practice,"  where  on  page  259  an  identical 
problem  is  given.  At  a  glance  it  will  be  noticed  that  the  solution  gives 
profit  and  loss  account  and  balance  sheet,  and  not  final  balance  sheet  and 
proht  and  loss  account,  as  the  question  requires. 

In  the  C.  P^A.  problems  in  Practical  Accounting,  given  by  the  Penn- 
sylvania State  Board  in  November,  1906,  one  problem  also  calls  for  a  bal- 
ance sheet  and  profit  and  loss  account,  which  sequence,  however,  seems  to 
be  improper.  It  is  the  balance  sheet  that  verifies  the  result  exhibited  by 
the  profit  and  loss  account,  and  not  the  latter  that  verifies  the  former 

The  profit  and  loss  account  is  arranged  as  in  Lisle's,  with  this  modi- 
fication, however,  that  the  result  of  manufacturing  is  closed  out  into  the 
trading  section,  which  again  is  credited  by  the  sales,  thus  showing  the 
actual  gross  profit. 

It  would,  perhaps,  be  more  in  accordance  with  theory  to  subdivide  the 
profit  and  loss  account  with  proper  headings  into:  Manufacturing,  Trad- 
ing, Admmistration,  and  Adjustment;  each  section  so  subdivided  to  show 
results  as  indicated  by  their  respective  headings. 

The  classification  in  the  balance  sheet  is  somewhat  different  from  that 
given  by  Lisle  in  his  solution,  insomuch  that  the  assets  as  well  as  liabili- 
ties arc  divided  into  current  and  fixed. 

While  the  cash  account  appears  in  its  proper  place,  at  the  beginning, 
yet  It  may  also  be  classed  last,  the  reasons  being  that  cash  is  already 
reahzed  and  does  not  need  to  be  turned  over  into  money;  another  reason 
for  not  placing  the  cash  where  it  is  would  be  the  poor  impression  that 
such  a  small  item  of  cash,  which  is  out  of  proportion  to  the  other  items 
m  the  balance  sheet,  would  make  upon  a  party  glancing  over  such  a  bal- 
ance  sheet.  In  this  particular  instance,  however,  the  effect  is  but  slight  so 
the  ordinary  form  was  used. 


Problem  2. 

This  problem  is  solved  in  two  forms :  the  first  form  is  that  given  bv 
Ijsle  m  his  Accounting  in  Theory  and  Practice,"  where  on  page  245  an 
identical  problem  is  given  with  solution ;  the  second  form  is  by  the  Com- 
parative Balance  Sheet.    The  latter  appears  to  be  more  suggestive  than 

r  Kr.™^l'  ^'  .'*  '^°'^'  "°*  ^'"^y  increases  and  decreases  in  assets  and 
liabilities,  but  gives  the  full  balance  sheet,  with  all  increases  and  decreases 
appearing  alongside  one  another,  and  offers  statistical  advantages  for  the 
period  under  surveillance;  furthermore  this  form  affords  more  detailed 
mformation,  as  all  the  items  are  included,  whether  they  changed,  from 
one  period  to  another,  or  not. 

163 


If  I 


I  ,ll  • 


Accounting  Problems  and  Solutions. 
Problem  4. 

In  this  problem  we  are  given  a  trial  balance  and  asked  to  prepare 
a  revenue  account,  etc.  The  nomenclature  in  this  instance  is  not 
used  well,  as,  according  to  Dicksee,  a  revenue  account  is  prepared  in  non- 
trading  concerns,  while  in  trading  concerns  a  profit  and  loss  account 
takes  the  place  of  the  revenue  account.  In  this  problem  it  is  quite 
apparent  that  this  is  a  pure  and  simple  trading  concern.  Why  then  a 
revenue  account? 

Another  undesirable  expression  we  find  in  this  trial  balance  is  Mer- 
chandise Account.  If  there  is  anybody  at  all  of  the  professional  brethren 
who  ought  to  emphasize  the  importance  of  keeping  the  merchandise 
account  subdivided  and  not  agglomerating  purchases,  sales,  returns,  etc., 
it  ought  to  be  members  of  the  State  Board.  By  arranging  the  problems 
m  the  shape  this  one  is  prepared,  bookkeeping  and  not  accounting  methods 
are  encouraged. 

While  this  problem  can  be  solved  in  different  forms,  the  method  used 
was  adopted  for  the  following  reasons : 

Due  to  the  agglomeration  of  the  purchases  and  sales,  etc.,  into  one 
account,  a  statement  of  profits  and  losses  will  give  clearer  results  than  a 
profit  and  loss  account. 

As  the  inventory  is  the  chief  item  missing  in  the  problem  this  was 
supplied,  in  order  to  complete  the  statement  and  make  up  the  balance 
sheet.  The  inventory  had  to  be  taken  at  random,  as  no  method  could  be 
applied  to  find  out  what  was  the  amount  of  merchandise  on  hand,  for  the 
reason  mentioned  above. 

The  arrangement  of  the  account  in  the  balance  sheet  follows  the 
manner  in  which  they  would  be  realized  and  liquidated. 


Problems  5  and  6. 

The  two  problems,  if  taken  as  representative,  disclose  the  difference 
in  standard  of  requirements  of  the  respective  boards,  in  1903. 

The  only  comment  worth  making  on  the  New  York  problem  is  that  the 
data  furnished  in  the  problem  are  rather  incomplete  for  an  intelligent 
solution  of  the  questions  asked. 

With  regard  to  the  make  up  of  the  Illinois  problem,  we  notice  that  the 
Board  asks  us  to  keep  the  old  traditional  Merchandise  Account.  They 
further  show  all  facts  agglomerated  and  not  properly  classified.  The  prob- 
lem is  rather  of  a  bookkeeping  than  of  an  accounting  nature,  and  the 
information  given  is  not  only  incomplete,  but  misleading. 

With  regard  to  solutions: 

In  solving  the  New  York  problem,  the  principles  and  forms,  as  sug- 
gested by  Prof.  Hardcastle  in  his  Accounts  of  Executors  and  Trustees 
were  observed. 

164 


Practical  Accounting  Problems. 

In  the  solution  of  the  Illinois  problem  the  exact  answers,  as  they  are 
required  by  the  Board,  are  given,  although  some  of  them  are  rather  super- 
fluous; viz.:  There  is  no  necessity  for  both  a  Statement  of  Assets  and 
Liabilities  and  a  Balance  Sheet. 

The  profits  and  losses  were  distributed  according  to  the  capital  invested 
and  the  time  that  such  capital  was  employed,  using  the  average  method. 

The  reader  is  referred  to  page  26  for  the  method  of  procedure  in 
averaging  accounts. 

The  item  of  Notes  Receivable  Discounted  was  arrived  at  by  an  analysis 
and  verification  of  the  Cash  Balance,  as  given.  Unless  there  were  some 
other  Cash  Receipts,  in  addition  to  those  mentioned,  there  would  be  a 
debit  instead  of  a  credit  balance,  which  is  hardly  possible.  It  must  follow 
that  some  of  the  Notes  Receivable  were  discounted,  a  sufficient  amount 
($7,556)  to  prove  the  balance  shown  in  the  problem. 

Problem  8. 

The  solution  to  this  problem  is  in  a  very  ordinary  form.  It  merely 
gives  the  answers  required,  without  any  explanatory  notes.  In  the  solu- 
tion of  some  other  similar  problem  (pages  105-107),  is  given  a  more 
elaborate  form,  containing  additional  information.  Further  comments 
are  also  given  on  pages  171-172. 

Problem   10. 

The  Balance  Sheet  as  constructed  from  the  figures  appearing  in  the 
statement  made  by  French's  bookkeeper  on  January  i,  1904,  shows  capital 
investment  of  French  to  the  amount  of  $45,9oo.  The  total  profit  as  shown 
by  French's  books  for  the  five  years  is  $36,150,  making  the  average  yearly 
profit  according  to  his  books  $7,230.  Three  times  the  average  profit 
amounts  to  $21,690,  which  is  the  value  of  the  Good  Will  according  to 
the  plan  adopted  by  French  &  Savage. 

By  the  terms  of  the  agreement  Savage  was  obliged  to  invest  $45,900 
plus  $10,845,  or  $56,745.  Good  will  is  to  be  placed  on  the  books  at  its 
full  value.  The  entry  necessary  to  effect  this  will  be  to  charge  Good- 
will and  credit  French's  capital  account  with  $21,690.  When  Savage 
makes  his  payment  of  the  $56,745,  the  entry  will  appear  in  the  cash  book 
on  the  debit  side  and  will  be  posted  to  Savage's  capital  account.  Since 
Savage  obtained  one-half  interest  in  the  business,  including  Good-will, 
French's  capital  account  should  be  charged  and  Savage's  capital  accoimt 
should  be  credited  with  just  the  amount  necessary  to  make  his  interest 
equal  to  that  of  French  or  $5,422.50. 

The  problem  is  silent  on  the  point  of  an  understanding  between  French 
and  Savage  regarding  the  value  between  themselves  of  the  finished  lathes 
on   hand   January    i,    1904.    Under    ordinary   circumstances    the    proper 
value  to  place  on  finished  goods  at  inventory  periods  is,  of  course,  the  '' 
cost  price,  provided  this  is  lower  than  the  market  value.    In  the  event 

i6s 


■■■:\ 


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""1 


Accounting  Problems  and  Solutions. 

of  a  change  in  the  partnership  it  is,  under  certain  circumstances,  justi- 
fiable to  anticipate  a  portion  of  the  profits  on  the  machines  which  are 
finished  and  ready  for  shipment.  Nothing  is  stated  regarding  such  an 
agreement  between  French  and  Savage  and  the  machines  are  conse- 
quently listed  at  cost  price.  f 

We  now  take  up  the  situation  as  found  by  the  accountant.  French 
on  January  i,  1899,  bought  out  Deyo's  interest  in  the  business,  amount- 
ing to  $16,000,  and  paid  therefor  $20,000,  part  in  cash  and  the  balance 
by  a  personal  note  secured  by  a  mortgage  on  his  property.  The  problem 
states  that  the  cash  transaction  alone  appeared  on  his  books.  This  cash 
disbursement  must  have  been  charged  to  Deyo's  capital  account  and  the 
balance  of  his  capital  account  transferred  to  French's  capital  account. 
This  is  shown  by  the  fact  that  when  the  profits  for  the  five  years,  amount- 
ing $36,150,  are  deducted  from  the  capital  as  shown  January  i,  1904, 
$45,900,  a  balance  of  $9,750  is  left,  to  which  must  be  added  the  withdrawals 
of  $16,250,  making  the  total  capital  at  the  beginning  of  the  five  years 
$26,000,  which  is  the  amount  of  French's  capital  account  ($15,000)  plus 
the  balance  of  Deyo's  capital  account  of  $11,000.. 

The  investment  of  Deyo  while  larger  than- that  of  French  so  long 
as  the  concern  continued  to  run  produced  *to  Deyo  a  profit  equal  to  that 
of  French  only.  Inasmuch  as  French  paid  $20,000  for  a  $16,000  invest- 
ment he  must  have  considered  the  value  of  half  the  Good-will  to  be 
$4,000.  It  would  therefore  seem  that  the  correct  entries  for  French  to 
have  made  on  his  books  to  record  properly  the  purchases  of  Deyo's 
interest  would  have  been,  first  to  charge  Good-will  account  with  $8,000  and 
credit  half  to  his  own  capital  account  and  the  remaining  half  to  the  account 
of  Deyo;  charge  the  cash  payment  of  $5,000  to  Deyo's  capital  account; 
make  a  journal  entry  charging  Deyo's  capital  account  with  $15,000,  and 
crediting  Bills  Payable  with  $15,000,  making  an  explanation  that  this 
note  was  secured  by  a  mortgage  on  French's  dwelling  house.  This 
would  leave  the  capital  account  of  French  stand  at  $19,000,  and  would  show 
among  the  assets  the  account  of  Good-will  valued  at  $8,000  which,  as 
stated  above,  is  the  valuation  placed  upon  the  Good-will  by  French  when 
buying  out  Deyo's  interest. 

Taking  up  the  question  of  depreciation,  we  find  that  on  January  i, 
1904,  the  machinery  account  stood  on  the  books  at  $45,000.  The  problem 
states  that  purchases  of  machinery  for  the  plant  during  the  five  years 
amounted  to  $20,000,  consequently  the  Machinery  Account  on  January  i, 
1899,  must  have  shown  a  balance  of  $25,000.  The  purchases  during  the 
year  1899  amounted  to  $3,000,  making  the  total  balance  on  December  31, 
$28,000.  Ten  per  cent,  depreciation  on  this  figure  amounts  to  $2,800  and 
leaves  the  value  of  the  Machinery  Account  $25,200.  On  December  i,  1900, 
the  Machinery  Account  would  stand  $25,200  plus  $3,500»  or  $28,700,  on 
which  the  depreciation  would  amount  to  $2,870.  In  this  manner  we  find 
the  depreciation  for  the  remaining  three  years  to  amount  to  $2,983, 
$3>i34-70>  and  $3>32i-23  respectively.  The  depreciation  for  the  five  years 
amounts  to  $15,108.93,  leaving  the  machinery  stand  at  a  valuation  of 
$29,891.07. 

166 


Practical  Accounting  Problems. 

The  revised  Balance  Sheet  of  January  i,  1904,  showing  machinery  at 
its  depreciated  value,  $29,891.07,  an^  the  stock  on  hand  at  the  correct 
'figure  $15,750,  also  including  the  item  of  Good-will,  $8,000,   shows  the 
capital  of  French  on  January  i,  1904,  to  amount  to  $37,791.07. 

From  the  profits  of  the  five  years  as  shown  by  French's  books  the 
depreciation  on  machinery  must  beideducted  in  order  that  .the  real  profit 
may  appear.  We  must  also  deduct  $1,000  from  the  profits  of  1904  because 
of  the  error  in  the  inventory.  We  find  that  the  correct  profits  for  the 
five  years  were  $2,200,  $2,430,  $3,767^  $5,365.30,  and  $6,278.77  respectively. 
On  this  basis  we  find  the  value  of  tl^  Good-will  to  be  $12,024.64. 

The  agreement  between  the  new  partners  was  that  Savage  should 
invest  an  amount  equal  to  the  capital  account  of  French  on  January 
I,  1904,  also  a  sum  equal  to  half  the  Good-will.  According  to  the  view 
taken  above,  the  Good-will  of  the  business  on  January  i,  1899,  was  valued 
by  French  at  $8,000  and  we  have  brought  the  item  into  his  capital  account 
as  of  January  i,  1904.  At  the  present  time  the  value  of  the  Good-will 
according  to  the  method  determined  upon  by  Savage  and  French  is 
$4,024.64  higher  than  on  January  i,  1899.  The  increased  value  of  the 
Good-will  has  been  due  to  the  effotts  of  French  in  building  up  the  busi- 
ness. In  admitting  a  new  partner  he  would  be  justified  in  crediting  the 
full  amount  of  the  Good-will  at  the  date  of  admission  of  the  new  partner 
^  to  his  account  and  requiring  the  new  partner  to  invest  a  sum  of  money 
equal  to  the  balance  of  his  capital  account  after  Good-will  has  been 
credited.  In  this  case  he  appears  to  have  allowed  as  an  inducement 
to  Savage  that  but  half  the  value  of  the  Good-will  should  be  credited 
to  his  account  and  the  remainder  distributed  in  equal  shares  between 
himself  and  the  new  partner,  thereby  allowing  a  premium  to  Savage  of 
one-fourth  the  Good-will. 

^  '  Inasmuch  as  an  item  of  Good-will  amounting  to  $8,000  already  appears 
in  French's  capital  account  it  would  seem  that  the  agreement  between 
the  partners  would  be  more  nearly  equitably  carried  out  by  crediting  to 
French's  capital  account  half  of  the  increase  of  the  value  of  Good-will 
($4,024.64),  amounting  to  $2,012.32,  making  the  total  amount  which  Savage 
should  contribute  $39,803.39.  The  remaining  half  of  the  increase  in  Good- 
will would  have  been  distributed  between  the  partners,  making  the  capital 
account  of  each  stand  at  $40,809.55. 

Savage's  investment  as  made  by  him  amounted  to  $56,745.  According 
to  the  figures  given  above  the  correct  amount  for  him  to  have  invested 
is  $39,803.39,  making  excess  capital  invested  by  him  to  the  amount  of 
$16,941.61. 

In  considering  the  Balance  Sheet  of  January  i,  1905,  the  following 
questions  arise:  How  shall  the  expense  of  moving  the. machinery  from 
the  old  factory  to  the  new  building  be  treated?  Qearly  this  is  not  an 
expense  chargeable  against  plant  under  conservative  management.  Another 
item  for  study  is  the  over  time  amounting  to  $9,000.  According  to  the 
statement  of  the  problem  the  work  which  was  gotten  out  as  a  result 
of  the  expenditure  of  $9,000  could  have  been  produced  by  an  outlay  of 
$6,000  under  normal  conditions.    It  would  therefore  seem  that  the  ex- 

167 


.  '\ 


i 


\,''. 


Accounting  Problems  and  Solutions. 

penses  of  wages  during  the  current  period  were  $3,000  higher  than  they 
should  have  been,  due  to  the  removal  of  machinery.  These  two  items 
may  properly  be  treated  by  opening  an  account  called  "  Removal  Ex- 
penses to  New  Factory"  and  charging  the  total  $10,375.00  against  this 
account,  and  writing  off  the  amount  over  say  five  years. 

Problem  13. 

Mr.  Jacobsson,  in  solving  this  problem  in  The  Journal  of  Account- 
ancy, states: 

"A  great  thinker  has  said  that  a  man  can  accomplish  almost  anything 
to  which  he  directs  his  attention,  providing  he  is  possessed  of  the  dual 
qualification  of  faith  and  hard  work. 

The  candidates  who  undertook  to  solve  this  unscientific  problem  needed 
an  infinite  quantity  of  faith  and  hard  work. 

Percentages  as  a  basis  of  comparison  ought  to  be  calculated  on  a  given 
base,  but  here  they  relate  to  a  statement  of  experience  which  does  not 
work  out  at  all,  hence  the  explanation  of  discrepancy. 

It  is  a  well  known  fact  that  the  examiners,  who  are  all  practicing 
accountants,  fall  into  the  greatest  temptation  to  draw  upon  their  own 
professional  experience  for  difficult  problems. 

Our  problem  under  review  will  defy  the  best  accountants  in  practice  to 
work  out  within  the  time  limit. 

It  is  all  very  well  to  test  the  candidate's  analytical  ability,  but  the  test 
must  be  scientific,  fair,  and  square,  and  the  examiners  should  not  draw 
too  freely  on  their  professional  experience." 

Any  one  familiar  with  C.  P.  A.  examinations  will  agree  with  Mr. 
Jacobsson  that  examiners  draw  freely  upon  their  experience  for  difficult 
problems,  but  there  would  be  no  great  objection  to  the  practice,  provided 
they  would  present  all  the  facts  of  the  case,  and  provided,  as  stated  in  Mr. 
Jacobsson's  comments,  that  these  facts  were  scientific  and  fair.  In  most 
of  such  cases,  however,  this  is  not  so. 

The  comparison  of  profits  by  means  of  percentages  based  upon  selling 
prices  is  certainly  unscientific.    To  quote  Dawson  on  this  subject: 

"In  taking  the  selling  price  as  the  base,  the  profit  is  necessarily 
included  therein — thus  the  base  will  vary  with  the  profits,  although  the 
underlying  motive  of  comparison  by  means  of  percentages  is  to  reduce 
results  to  a  common  base." 

This  variation  is,  moreover,  uncontrolled  by  any  principle,  being,  in 
the  case  of  a  large  proportion  of  profits,  entirely  disproportionate  to  the 
variation  caused  by  a  smaller  rate  of  profits.  As  an  instance,  10  per  cent 
of  profit  computed  upon  the  cost  price  is  equal  to  9  i/ii  per  cent,  when 
the  same  result  is  taken  upon  the  selling  price,  but  if  50  per  cent,  of  profits 
on  cost  prices  be  computed  on  selling  prices  it  will  only  show  33  1/3  per 
cent.  Furthermore,  as  the  selling  price  is  composed  of  the  cost  price  and 
the  profit,  the  latter  cannot  exceed  the  selling  price,  from  which  it  follows 
that  a  profit  based  upon  selling  prices  cannot  equal  or  exceed  100  per  cent. ; 
if  the  goods  have  cost  anything  at  all. 

168 


Practical  Accounting  Problems. 

That  this  is  also  in  accord  with  economic  principles  is  shown  by  the 
following  extract  from  John  Stuart  Mill's  "  Political  Economy  *'  :  "  The 
capitalist,  then,  may  be  assumed  to  make  all  the  advances  and  receive  all 
the  produce.  His  profit  consists  of  the  excess  of  the  produce  over  the 
advances;  his  rate  of  profit  is  the  rate  which  that  excess  bears  to  the 
amount  advanced." 

A  State  Board  of  Accountancy  ought  to  present  problems  which 
should  be  scientific,  and  which  could  be  solved  according  to  rules, 
especially  in  a  mathematical  problem  of  this  kind. 

Problem   14. 

In  the  solution  of  this  problem,  the  results  of  the  various  departments 
are  shown  separately;  thus  the  Manufacturing  Account  is  arranged  to 
show,  Prime  Cost  and  Cost  of  Production ;  the  Trading  Account,  to  show 
Gross  Profit  on  goods  manufactured  and  also  to  show  separately  Gross 
Profit  on  goods  bought. 

In  this  solution  it  was  very  convenient  to  dissect  the  Inventory,  as  it 
rightly  should  be,  into  the  various  elementb  it  is  composed  of,  namely: 
Inventory  of  Raw  Materials,  Inventory  of  Finished  Goods,  etc.  In  the 
Trading  Account  such  expenditures  as  Advertising,  Insurance  on  Mer- 
chandise, etc.,  have  been  classed  in  the  first  section  showing  Gross  Profit 
on  our  own  goods,  as  from  the  question  it  is  difficult  to  draw  the  line  and 
indicate  how  much  of  it  belongs  to  the  section  dealing  with  our  own 
goods,  and  how  much  of  it  belongs  to  the  section  showing  the  result  of 
goods  purchased. 

Problem   1 5. 

The  final  part  of  the  question  reads:  "After  stating  the  net  profits 
for  the   current  year,   make   the   same   reserves   for   depreciation,   etc,," 
which  is  somewhat  ambiguous.    Depreciation  is  a  charge  against  profits, 
while  net  profit  is  arrived  at,  after  all  charges  are  deducted. 
With  regard  to  the  solution: 

The  Trading  Account  is  arranged  to  show  gross  profit  on 
goods  sold,  regardless  of  such  charges  as  advertising,  salesmen, 
expenses,  etc.  All  other  charges,  though  some  of  them  are  rather 
directly  connected  with  sales,  are  carried  to  the  Profit  and 
Loss  Account,  where  the  final  net  profit  for  the  current  year  is  shown. 
This  being  a  manufacturing  concern,  it  is  fair  to  arrange  the  Trading 
Account  as  it  is,  while  were  it  a  pure  trading  concern  instead  of  a  manu- 
facturing, and  the  question  called  for  a  Trading  and  a  Profit  and  Loss 
Account  such  expenditures  as  advertising,  salesmens'  charges,  etc.,  would 
probably  have  to  be  classified  with  the  trading  account  and  not  with  the 
profit  and  loss  account. 

In  the  Balance  Sheet  reserves  are  deducted  from  each  particular  asset, 
against  which  exception  was  taken,  instead  of  enumerating  them  in  the 
liability  side  of  the  Balance  Sheet  (as  some  prefer),  to  avoid  ambiguity. 

169 


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Accounting  Problems  and  Solutions. 

The  problem  is  silent  about  the  deduction  or  creating  of  a  reserve  for 
depreciation  on  tools  and  implements  as  well  as  on  furniture,  so  no 
charge  has  been  made,  nor  a  reserve  created.  The  problem  further  fails 
to  mention  anything  in  regard  to  a  reserve  for  bad  debts,  so  none  is  cre- 
ated, although  in  this  particular  instance,  losses  through  bad  debts 
having  occurred, — as  by  the  terms  of  the  problem,  the  reserve  for  that 
purpose  has  been  encroached  upon, — a  3%   reserve   would  be  desirable. 


Problems  16-18. 

Not  much  comment  is  called  for  upon  the  solution  of  the  sixteenth 
problem,  except  the  change  in  arrangement  of  assets  and  liabilities. 
Why  should  a  Washington  State  Board,  or  for  that  matter  any 
other  State  Board,  in  the  United  States,  follow  the  English  form,  as  laid 
down  in  the  Companies  Act  (England)  of  1862?  To  quote  Lisle  on  this: 
"  The  fundamental  idea  of  a  Balance  Sheet  is  that  it  is  a  statement  show- 
ing how  the  Ledger  Accounts  of  a  concern  stand  at  a  particular  moment 
of  time.  It  would  be  unnecessary  if  we  could  see  and  comprehend  at  one 
view  the  contents  of  a  set  of  ledgers.  As  we  are  unable  to  do  this  we 
prepare  a  Balance  Sheet,  but  why  in  the  process  the  assets  which  are  on 
the  debit  side  and  the  liabilities  which  are  on  the  credit  side,  as  according 
to  the  principles  of  accounting  they  ought  to  be,  should  change  places,  it 
is  impossible  to  justify." 

In  the  solution  of  the  17th  question,  Notes  Receivable  Discounted  has 
been  credited  and  not  Notes  Receivable  (as  some  prefer),  for  the  reason 
that  there  remains  a  contingent  liability;  if  Y  does  not  pay  for  the  note 
X  must  make  it  good,  and  this  contingency  should  be  recorded  in  X's 
books.  When  Y  pays  for  the  note  at  maturity,  we  debit  Notes  Receivable 
Discounted  and  credit  Notes  Receivable,  thus  wiping  out  the  contingency 
previously  recorded. 

In  regard  to  the  solution  of  the  i8th  question,  it  has  been  assumed 
that  the  profits  ($12,000),  in  the  third  year,  are  obtained  after  charging 
interest  as  was  the  case  in  the  first  and  second  years.  Interest  is 
charged  on  withdrawals,  as  the  problem  emphasizes  that  these  withdrawals 
are  in  excess  of  salaries  allowed,  hence  decrease  the  investment,  and  if 
the  investment  is  credited  with  10%  interest,  it  is  but  fair  that  withdrawals 
should  be  charged  with  10%  interest. 

Problems  20-21. 

With  all  due  respect  to  the  New  York  State  Board  of  Accountancy 
for  setting  a  high  professional  standard  for  C.  P.  A.  examinations,  one 
cannot  help  speaking  a  few  words  in  favor  of  the  accountant  student. 

A  perusal  of  Bulletin  15,  June,  1903  (C.  P.  A.  Syllabus),  of  the  Uni- 
versity of  the  State  of  New  York  will  reveal  the  fact  that  the  syllabus 
calls  for  Manufacturing  Accounts  and  not  Cost  Accounts.  It  reads: 
"  Accounts  to  indicate  causes  of  loss  by  a  firm  whose   sales  and  cost 

170 


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Practical  Accounting  Problems. 

calculations    indicated    a    profit Manufacturing    and    Loss 

and  Gain  Accounts,  and  Balance  Sheet,"  etc.  Reading  this  paragraph  in 
the  syllabus  the  candidate  for  the  C.  P.  A.  degree  certainly  does  not 
expect  to  be  surprised  with  such  a  problem  as  Question  1-2,  especially 
when  on  page  240  of  the  above  mentioned  syllabus  it  is  stated  that  the 
outline  of  the  latter  is  also  "to  serve  as  a  limitation  to  those  who 
prepare  the  questions/' 

It  is  true  that  Cost  Accounting  is  becoming  a  prominent  feature  of 
the  accounting  profession,  yet  this  is  no  reason  why  the  accountant 
student  should  not  find  at  the  C.  P.  A.  examinations  what  he  expects  to 
find  according  to  the  C.  P.  A.  syllabus  or  else  have  the  latter  revised. 

Similarly  with  Question  i  (October,  1907),  one  can  hardly  tell  under 
what  section  of  the  subject  of  Practical  Accounting  this  would  come. 
Surely  not  under  that  of  "accounts  involving  bonds  and  other  securi- 
ties," as  the  syllabus  does  not  disclose  in  the  least  the  stress  put  by  the 
State  Board  in  this  given  problem,  the  solution  to  which,  to  be  accurate, 
and  this  the  Board  certainly  requires,  would  take  three  or  four  hours' 
work  by  the  experienced  practitioner.  How  then  shall  the  candidate 
solve  it  in  much  less  time? 

With  regard  to  the  solutions  it  will  be  noticed  that  although  the  final 
results  in  both  cases  (Forms  I  and,  II)  are  the  same,  each  solution 
showing  a  net  profit  of  $54,193-98,  yet  in  the  presentation  of  the  solutions 
as  well  as  in  the  technique  there  is  no  doubt  that  Solution  I  is  clearer. 
The  answer  in  the  latter,  relating  to  the  percentage  to  be  calculated  and 
added  to  each  $1  of  material  and  labor  to  give  total  cost,  appeals  to  us 
more  than  the  percentages  arrived  at  in  Solution  II.  At  least  in  Solution 
I,  proof  is  furnished  for  the  given  answer. 

The  opening  statement  as  given  in  Solution  II,  is  superfluous.  In  the 
first  place  the  question  does  not  call  for  it,  and,  secondly,  the  assumption 
that  the  capital  at  the  beginning  consisted  of  the  inventories  only,  as  given 
in  Paragraph  I  of  the  question,  is  quite  strained. 

The  attention  of  the  reader  is  also  called  to  the  fact  that  in  Solution  I, 
Factory  Expense  Account  has  $24,444.15  and  Management  Expense 
Account  $37,496.26,  while  according  to  percentages  shown  the  respective 
accounts  should  have  $24,449.30  and  $37,491.60.  The  latter  figures  are  more 
correct,  but  the  problem  requires  us  to  use  the  former,  hence  the 
difference. 

Both  solutions  are  presented  in  order  to  give  the  reader  a  choice  be- 
tween the  two  opposing  views. 

Problem  22. 

The  adopted  form,  dividing  the  realization  account'  into  four  oarts, 
brings  out  many  important  features ;  viz. :  By  addin;;  assets  realized  with 
assets  not  realized  we  find  the  total  to  be  $96,610.00,  which  total,  subtracted 
from  assets  to  be  realized,  leaves  a  difference  of  $23,612.00,  which  is  a  loss 
on  the  realization  prcper.  If  this  total  is  added  with  the  item  expenses  in 
connection  with  accommodation  account,  $2,200.00,  we  have  the  total  gross 

171 


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Accounting  Problems  and  Solutions. 

loss  on  the  realization,  namely,  $25,812.00.  Adding  liabilities  liquidated 
with  liabilities  not  liquidated,  the  total  equals  the  total  sum  of  liabilities 
to  be  liquidated. 

The  last  part,  Supplementary  Charges  and  Supplementary  Credits, 
shows  the  trustee's  subsequent  operations,  viz.:  Charges  $76,560.00  (de- 
ducting $2,200.00  of  expenses  connected  with  accommodation  account) 
against  credits  $102,002.00,  leaving  a  gross  gain  on  trustee's  operation  of 
$25,442.00,  which  sum,  deducted  from  losses  on  realization  ($25,812.00), 
leaves  a  net  loss  of  $370.00. 

The  interest  paid  on  the  mortgage  is  divided;  as  the  first  payment  for 
six  months  belongs  to  a  period  preceding  the  trusteeship,  while  the  latter 
for  one  year  belongs  to  the  trusteeship  period. 

Expenses  on  accommodation  are  classed  with  supplementary  charges, 
as  it  was  not  a  liability  to  be  liquidated,  and  hence  could  not  be  classed 
anywhere  else  but  with  supplementary  charges. 

Problem  23. 

The  item  factory  site  and  buildings,  $90,000,  is  omitted  from  the 
realization  column  on  the  asset  side,  as  the  bond  is  supposed  to  be  covered 
by  a  mortgage  on  the  same;  for  the  same  reason  are  the  other  three 
items,  viz.,  machinery,  boats,  and  horses  and  trucks,  omitted.  The  item 
taxes  and  wages,  $2,500,  is  deducted  from  the  assets,  as  this  is  a  preferred 
claim,  and  must  be  miet  from  the  total  assets  before  any  of  the  creditors 
can  realize. 

From  the  accounts  payable  on  the  liability  side  are  subtracted  $39,000, 
viz.,  $30,000  for  the  amount  realized  on  the  sale  of  the  machinery;  $6,000 
for  the  amount  realized  on  the  sale  of  the  boats;  $3,000  for  the  amount 
realized  on  the  sale  of  the  horses  and  trucks,  all  being  subject  to  a  chattel 
mortgage  to  secure  accounts  payable  so  deducted. 

As  the  sale  of  the  machinery  does  not  cover  the  amount  due  the 
mortgagee,  although  the  problem  is  silent  as  to  the  fact,  yet,  from  the 
construction  and  wording  of  the  average  mortgage  instrument,  the  mort- 
gagor is  liable  for  any  deficiency.  This  is  also  true  from  a  legal  standpoint 
in  bankruptcy  matters.  So  the  mortgagee  is  permitted  to  share  in  the  re- 
maining assets  pro  rata  with  the  other  creditors. 

Interest  on  bonds,  although  scheduled,  could  not  legally  be  enforced,  as 
other  creditors  could  insist  that  the  same  be  covered  from  the  security — 
the  factory  site  and  buildings — unless  surrendered,  instead  of  from  other 
assets,  for  the  simple  reason  that  every  mortgage  reads  that  the  security 
covers  both,  capital  as  well  as  interest. 

Problems  24-26. 

There  are  a  few  details  in  the  make  up  of  the  problems  which  deserve 
comment. 

In  the  24th  question  the  accounts  in  the  Trial  Balance  are  arranged 
in  rather  hap-hazard  shape.     It  would  be  more  desirable  to  have  them 

179 


Practical  Accounting  Problems. 

arranged  so  as  to  facilitate  the  preparation  of  business  and  financial  state- 
ments, viz. :  Real  Accounts,  Nominal  Accounts,  Customers  and  Creditors, 
or  some  similar  arrangement. 

In  the  25th  question,  the  language,  reading:  "100  shares  are  placed 
in  the  treasury  for  future  disposition  .  .  .  ,"  and.  "  Each  incorporator 
then  donates  30  shares,"  etc.,  is  misleading,  especially  when  one  considers 
that  there  is  no  class  of  stock  so  ill  defined  as  "  Treasury  Stock !"  From 
the  wording  one  would  infer  that  the  board  acknowledges  in  this  instance 
250  shares  as  treasury  stock,  which  would  not  be  consistent  with  modem 
accounting  principles. 

In  the  26th  question  not  all  the  facts  are  presented,  resulting  in 
omission  of  the  Deficiency  Account,  which  account  would  be  desirable  in 
order  to  prove  the  accuracy  of  the  Statement  of  Affairs. 

With  regard  to  the  solution  of  the  24th  question,  the  amounts 
appearing  in  the  Profit  and  Loss  Statement  as  well  as  in  the  Balance 
Sheet,  are  those  arrived  at  after  the  adjustment  entries  are  respectively 
added  or  subtracted. 

In  solving  the  25th  question  no  attention  was  paid  to  the  stock  put 
aside  for  future  disposition,  as  it  is  merely  unsubscribed  stock.  To  quote 
Rahill  on  this :  "  It  is  clear  that  the  amount  of  stock  the  incorporators  or 
promoters  reserve  to  be  sold  at  some  future  time  as  the  needs  of  the 
company  may  require  is  not  an  asset,  but  is  issued  against  an  asset;  its 
issue  involves  the  creation  of  a  liability  in  proportion  to  the  asset 
exchanged  for  it,"  hence  we  cannot  call  it  Treasury  Stock. 

In  the  solution  of  the  26th  question  no  Deficiency  Account  is  given 
for  reasons  mentioned  above. 


Problems  28-29. 

In  presenting  these  problems  the  monetary  system  was  changed  in 
order  to  render  the  solution  more  easily  comprehensible  by  American 
readers. 

The  make-up  of  the  problems  is  in  rather  a  haphazard  form,  and,  to 
some  extent  at  least,  impractical.     If  the  examination  is  supposed  to  be  in 
Practical  Accounting  the  questions,  surely,  ought  to  be  practical.     The 
first  question,  while  rather  a  good  test  problem,  is  lacking  the  finishing 
touch  which  would  make  it  as  though  it  were  taken  from  actual  practice. 
There  is  no  item  of  rent  included,  which  is  rather  strange.     Whether  the 
Mill  owns  Real  Estate  or  not,  there  surely  ought  to  be  a  charge  for  rental. 
Another  unpractical  arrangement  we  can  observe  in  the  item  "yam 
(used)".     The  question  begins:    "The  following  figures  are  taken  from 
the  books  of  the  A.  B.  Mills,"  etc.,  and  the  first  item  is  certainly  not 
shown  directly  on  the  books,  but  arrived  at  after  taking  into  consideration 
various  elements,  such  as  Purchases,  Retiu-ns,  Inventory,  etc.     It  would 
be  better  to  give  all  the  accounts  that  result  in  the  figures,  showing  how 
much  yarn  was  used.    For  the  preparation  of  a  Balance  Sheet,  as  required 
m  the  problem,  we  necessarily  desire  to  know  the  inventory  of  goods  on 

173 


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Accounting  Problems  and  Solutions. 


Practical  Accounting  Problems. 


iiiii 


hand.     A  going  concern,  such  as  this  is  supposed  to  be,  surely  has  some 
stock  on  hand. 

There  are  no  comments  to  be  made  regarding  the  make  up  of  the 
29th  question.  What  attracts  our  particular  attention  in  the  make  up 
of  the  paper  of  this  examination  is,  that  the  problems  are  of  a  general 
character,  as  they  should  be,  and  not  very  specialized. 

The  accounts  in  the  Trial  Balance  are  arranged  in  the  following 
order:  Real,  Nominal,  Personal,  and  Capital.  The  respective  debits  or 
credits  of  each  of  the  accounts  were  arrived  at  by  an  analysis  of  the  nature 
of  each  account. 

Proper  division  of  the  nominal  accounts  into  the  various  sections  of 
the  Profit  and  Loss  Account  was  made,  with  the  exception  of  Insurance, 
Taxes,  and  Depreciation,  which  were  not  charged  to  Manufacturing,  but 
to  the  Profit  and  Loss  section.  The  wording  of  the  problem  is  not  clear 
enough  for  an  apportionment  of  these  items,  hence  they  are  shown 
as  of  a  general  nature. 

In  solving  the  29th  question  it  was  inferred  from  the  phrasing  of 
the  question  that  Eusebius  Robinson  was  the  manager  of  the  adventure, 
hence  the  reason  why  a  full  record  of  the  adventure  is  kept  in  his  books, 
from  the  time  of  shipment  until  the  final  remittance  is  received,  while 
such  is  not  the  case  in  Brown's  books. 


Problems  30-32. 

It  will  be  noticed  that  the  monetary  system  in  which  the  questions  were 
originally  given  (English)  is  changed  into  American.  The  form  in 
which  the  questions  appeared  was  also  slightly  modified  to  make  it  more 
in  accordance  with  American  ideas  and  customs,  and  thus  make  the 
solutions  more  easily  comprehensive  by  American  readers. 

The  32d  question  is  rather  incomplete.  Surely  the  intention  of  the 
examining  board  was  not  only  to  ask  for  "crediting  each  partner  with 
interest  on  Capital,"  but  a  good  deal  more.  From  the  wording,  however, 
the  inference  would  be  merely  to  credit  partners'  accounts  with  interest. 
We  see  that  our  examining  State  Boards  are  only  a  type  of  the  average 
examining  bodies.  It  is  noticeable  that  examining  boards  everywhere  do 
not  prepare  the  examination  questions  with  the  care  which  they  should 
use.  The  wording  of  problems  in  many  instances  calls  for  one  thing  while 
common  sense  will  indicate  an  entirely  different  construction.  This  am- 
biguity tends  to  confuse  the  candidate  taking  the  examination. 

In  solving  the  30th  question,  before  appropriating  the  profits  to  the 
partners'  accounts,  the  interest  charges  on  capital  were  deducted.  No 
interest  was  charged  on  Partners'  Withdrawals  for  the  following  reasons : 

THese  drawings  were  made  in  the  same  proportion  that  each  partner 
shared  in  profits  or  losses,  namely,  4/10,  3/10,  and  3/10,  respectively,  so 
that  no  one  of  the  partners  is  affected  in  any  way. 

Secondly,  they  were  made  at  the  end  of  the  month  against  profits  which 
were  already  earned,  and  to  which  the  members  of  the  firm  were  entitled. 

174 


Finally,  they  do  not  exceed  the  profits  made,  but,  on  the  contrary,  the 
latter  are  a  great  deal  in  excess  of  the  former. 

With  regard  to  the  solution  of  the  31st  question,  the  American 
method  has  been  followed  for  both  the  Statement  of  Affairs  and  the 
Deficiency  Account. 

It  will  be  noticed  that  the  item  "  Z's  Household  Furniture  '*  is  included 
in  both  the  Statement  and  the  Deficiency  Account,  in  order  to  have  the 
complete  facts,  yet  it  is  omitted  in  the  "  Nominal  Value  "  column,  as  this 
column  represents  book  values,  and  this  item,  surely,  was  not  on  the  books 
of  the  firm. 

In  the  32d  question  the  accounts  are  so  arranged  as  to  show  the  final 
balances  on  January  i,  1907.  The  Profit  and  Loss  Appropriation  Account 
is  given  for  the  purpose  of  charging  the  interest  on  capital  against  the  net 
profits  on  trading.  This  act  is  justified  from  the  wording  of  the  problem : 
"The  trading  for  the  three  years  has  resulted,"  etc. 

In  the  solution  of  the  30th  as  well  as  the  32d  question  a  separate 
account  was  opened  for  current  operations  under  the  heading  "Drawing 
Account "  and  another  account  under  the  heading  "  Capital  Account,"  the 
former  being  charged  with  Withdrawals  or  Losses  and  credited  with  all*" 
sources  of  income.  The  balance  was  carried  to  the  Capital  Account,  which, 
if  a  debit  balance,  was  charged  against  the  investment ;  if  a  credit  balance, 
it  was  added  to  the  previous  capital,  the  final  balance  showing  Capital  or 
Present  Worth  of  the  Partners. 

Problems  33-34. 

With  regard  to  Solution  33,  it  will  be  noticed  that  each  subscriber  is 
charged  for  his  respective  share  to  the  subscribed  stock.  While  this 
method  of  treatment  may  be  at  variance  with  some  authorities,  the  author 
thinks  it  brings  out  the  facts  of  the  transaction  much  more  clearly. 

The  34th  question  is  solved  in  two  different  forms.  The  first  solu- 
tion is  the  exact  form  as  required  by  the  Board,  the  second  is  what  is 
called  a  "  Statement  Form."    The  result  is  the  same  in  either  case. 

The  bonus  is  calculated  after  deducting,  from  the  profits,  the  salary 
and  10%  of  the  combined  capital,  as  per  wording  of  the  problem.  Thus 
in  1902  the  bonus  is  arrived  at  in  the  following  way: 

Profits,   before   adjustments $4,250  00 

Less  salary  allowance $900.00 

10%  of  capital   ($14,550.00) 1,455.00    2,355.00 

Remaining  balance   (excess) $1,895.00 

From  this  figure  the  bonus  is  reckoned  thus: 

Excess   balance $1,895.00 

32iyo  of 1,500.00=  $500.00 

25%  of  39500=     98.75 

Total  bonus  $598.75 

175 


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ii 
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Accounting  Problems  and  Solutions, 

Interest  has  been  charged  on  yearly  balances,  ignoring  the  fact  that 
the  salary  was  not  drawn.  Wells  had  a  right  to  draw  this  sum  any  time 
he  desired,  and,  consequently,  cannot  claim  interest  on  this  current  item. 

This  problem  could,  perhaps,  be  solved  in  many  more  ways,  depending 
on  the  interpretation  given  to  the  wording.  The  method  adopted  here 
is  such  as  a  candidate,  considering  the  time  limit  at  examinations,  could 
safely  follow  in  solving  the  problem. 

Interesting  in  this  connection  is  the  requirement  of  the  present  Board 
in   strictly   carrying  out  the   Rules   of   the   Board   with   regard   to  the 

following : 

"  Any  applicant  before  being  entitled  to  receive  a  C  P.  A.  Certificate 
must  have  had  at  least  two  (2)  years  continuous  practical  experience 
in  public  accounting  immediately  preceding  the  date  of  application." 

"  In  the  event  of  the  applicant  failing  to  pass  the  examination,  he  may 
be  re-examined  in  accordance  with  the  law  and  rules  of  the  Board,  after 
one  (i)  year  upon  the  payment  of  an  additional  fee  of  $25.00." 

"Applicants,  when  required,  must  appear  in  person  before  the  Board 
to  answer  any  question,  or  produce  any  evidence  to  sustain  such  facts  as 
may  be  necessary  to  determine  the  qualifications  of  the  applicant  as  pre- 
scribed by  the  law  and  rules  of  the  Board." 

Under  the  first  and  last  rule,  the  Board  debars  bookkeepers  who  have 
never  practiced.  The  advisability  of  the  second  rule  is  questionable. 
Surely  six  months  would  serve  the  purpose  just  as  well. 

Problem  35. 

The  first  step  to  be  taken  in  the  problem  is  to  charge  the  Profit  and 
Loss  Account  with  the  amount  necessary  to  be  set  aside,  crediting  the 
amount  to  the  Reserve  account,  which  then  represents  profits  set  aside 
for  this  specific  purpose  and  not  available  for  dividends.  The  next  step 
is  to  invest  the  cash  in  some  interest  bearing  security  or  (as  in  the  prob- 
lem before  us)  deposit  it  in  a  special  account.  When  interest  on  the 
investment  is  received  it  becomes  a  credit,  not  to  the  regular  Interest 
account  or  to  the  Profit  and  Loss  account,  but  to  the  Reserve  account. 
As  soon  as  the  interest  credits  become  large  enough  to  make  an  invest- 
ment, securities  should  be  purchased  and  the  amount  charged  to  the  In- 
vestment account.  In  business  where  the  sinking  funds  reach  larger  propor- 
tions the  interest  is  sometimes  carried  in  a  special  account  called  "  Interest 
on  Investments  of  Sinking  Funds."  The  interest  is  not  under  any  circum- 
stances a  credit  to  the  Investment  account. 


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176 


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f),/f  ,°'^'"^'""^^^^®'=*^'^''"^'*'°ns  ^ith  answers  on  each  of 
ComJercraT!  /w  '  tI'  ^  ^^'°^  °'  ^^^°'-''^*^'  Auditing  and 
Sric  PennsviTni.  l^r  ^"'\*^°'l'  ^""^  ^^'^^^^^^  from  thi  New 
York,  Fennsylvania,  Illinois,  Michigan,  Maryland,  Washington 

^9ollZ\T^''  ^"^  ^'^^"^'^  -^--^-'^  P^^Pers  oiTo6: 

Theory  of  Accounts. 

Questions. 

rt,    K^  J^''f  ''  ^  ''"''*"^  *""^-     ^°"  should  the  account  be  treated  on 
the  books  of  a  corporation?  treatea  on 

,tn/lf  ^J^r"""  *'  T''°'^  °*  determining  the  number  of  shares  of  capital 
stock   both  common  and  preferred,  held  by  each  of  the  several  stockho  d 
e  s  of  a  corporation,  giving  fully  the  titles  of  the  books  wherein  the  fa" 
are  registered  and  stating  how  the  books  are  opened  and  operated 
iJ^Z  TT^TJ''  °''S^°'«d  with  an  authorized  capital '  stock  of 
$50,000  of  which  only  $40,000  is  sold,  and  stock  certificates  issued  therefor 
The  conflictmg  methods  of  recording  the  capital  stock  on  the  books  are 

r„rri\         !  the  following:  (a)  Fixed  assets  and  fixed  liabilities     (b) 
Current  assets  and  current  liabilities.  """"les.     ^D; 

shoufi  b^k^^"''"^''""''"  ^^^°'"""  '"'  ''="^  "-  ■•"  y°-  opinion  it 

(7)  What  is  the  purpose  of  the  following  acrnnntc    or, A  u«  .i. 
created  on  the  books:    (a)  Sinking  Funds f    (b)  Reserve  FuL,7    t"< 
Depreciation?    (d)  Goodwill?                  ''^-     W  Reserve  Funds?     (c) 

(8)  Name  the  various  forms  of  Capital  Stock,  with  full  explanations. 

sheet"  and  "111'  ^''^7'""  '"  """"'"«  ^^'^^'"  '^^  t^™^  "balance 
sneet,    and     statement  of  assets  and  liabilities." 

=.n/'°^v"''  ^  ?'^  ^^  *°  P™""^^  f°'  controlling  accomits  of  debtors 
^^ibTelntf °  '°'  """  '•"  -"— '  "'""^  -eitblf^n-d 

«,  rll'^  rf""'*  *  ^"""P^ny  «'"«'  on  Jones  &  Company  for  an  account  of 

&he  r'"^  '  r  ""*•  '"^°""*-  ^'  •"''*""«y  ">«  acceptors  borrow 
Ive^  fintlf  "T'  !f  °°  1°  '''*'*  *'■"  '"  ""^^''"S  the  draft,  which  is,  how" 
loan'of tl""""'"  '°  '^  """•"'<*•    J°"-  '^  Company  repay  $300  'of  t^e 

trant:o:sVr:tLprer  '"  ^^  '°°''  °'  ""''  *  ^""''-^  '^^^  ^' 

booLLeUr  '°"'''"''  *"'  """"*""  °*  ""^''  '"''^  ""'*  °*  """"^  '°'^ 

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Accounting  Problems  and  Solutions. 

(13)  A  owes  B  $1,000  and  B  draws  on  liim  for  the  account  at  60  days. 
The  draft  is  accepted  by  A,  whereupon  B  takes  it  to  the  bank  for  dis- 
count. The  bank  discounts  the  paper  57  days  before  maturity,  at  6  per 
cent,  per  annum.    Show  the  entries  you  would  make  in  the  books  of  B. 

(14)  Define  and  differentiate  your  understanding  of  a  trial  balance; 
a  balance  sheet;   statement  of  aflfairs;   trading  statement. 

(15)  Outline  your  understanding  of  the  most  approved  method  of  keep- 
ing a  merchandise  account,  and  give  titles  of  subdivisions  you  would 
suggest. 

(16)  Define  your  understanding  of 

(a)  Reserve  Account. 

(b)  Reserve  Fund. 

(c)  Income  and  Expenditures. 

(d)  Receipts  and  Disbursements. 

(e)  Good  Will. 
(/)  Income  Bonds. 

(17)  Corporation  X  makes  a  practice  of  charging  to  expense  and  car- 
rying to  Depreciation  Reserve  account  every  half  year  a  certain  per- 
centage of  the  book  value  of  its  plant  and  machinery.  What,  in  your 
opinion,  is  the  correct  method  of  dealing  in  this  case  with  repairs  and 
renewals:  i.  e.,  should  the  latter  be  charged  to  Profit  and  Loss,  or  can 
they  properly  be  charged  to  Depreciation  Reserve  Account?  Give  reasons 
for  your  answer. 

(18)  What  do  you  undersUnd  to  be  the  meaning  of  the  term  "  Secret 
Reserves?"  Give  some  examples  of  Secret  Reserves,  and  state  your 
opinion  as  to  the  propriety  or  otherwise  of  the  creation  of  such  reserves, 

giving  reasons. 

(19)  What  is  meant  by  the  voucher  system  of  bookkeeping?   Describe 

the  voucher  record  book. 

(20)  Describe  the  different  methods  of  determining  the  loss  or  gain 
of  a  business.  How  is  the  loss  or  gain  of  a  business  determined  from 
books  kept  by  single  entry?  State  the  usual  mode  of  procedure  when  the 
books  are  kept  by  double  entry. 

(21)  What  is  understood  by  the  term  "net  profit?"  State  the  final 
disposition  of  net  profit  in  the  books  of  a  partnership ;   of  a  corporation. 

(22)  What  is  a  stock  ledger?  Explain  the  nature  of  its  records  and 
describe  the  manner  in  which  they  are  made.  What  relation  does  this 
book  bear  to  the  general  books  of  a  corporation? 

(23)  You  are  requested  to  open  the  necessary  books  for  recording  the 
organization  and  business  operations  of  an  incorporated  company  having 
three  forms  of  Capital  Stock. 

(a)  State  what  books  are  necessary. 

(b)  Name  the  various  forms  of  Capital  Stock  and  how  created, 

stating  the  rights  and  privileges  of  each.    ^ 

(24)  A  corporation  has  an  issue  of  preferred  stock  entitled  to  cumu- 
lative dividends  of  7%  a  year.  The  dividend  payments  are  in  arrear. 
Should  the  arrears  of  dividends  appear  on  the  balance  sheet,  and  if  so, 
Low  should  they  be  stated? 


Questions  in  Theory  of  Accounts. 

(25)  How  should  inventories  be  treated  in  closing  the  ledger  at  the 
end  of  a  fiscal  year?  Is  the  common  practice  of  adding  the  inventory  of 
goods  on  hand  to  the  credit  side  of  a  merchandise  account  theoretically 
correct?    Explam  fully.  ' 

(26)  In  case  a  manufacturing  company  having  purchased  a  large  stock 
of  material  during  the  year  at  low  prices,  but  at  time  of  annual  in- 
ventory values  had  increased.  How  in  your  opinion  should  the  inventory 
be  valued,  at  cost  or  prevailing  market  price? 

fJV.^!^^^  '"^  ^^^  ^°''"  °^  ^'°"'"^^  ^"^"^^  *^^  following  transactions: 
KO)  installment  notes  given  on  purchase  of  real  estate,  the  face  of  said 

notes  including  interest  charges  up  to  maturity  of  the  notes 
W  Loss  by  fire  of  buildings,  fixtures,  and  merchandise;  loss  sustained 

by  owner  over  and  above  the  insurance  carried  and  the  amounts  due 

and  collected  from  the  insurance  companies. 

(c)  Increase  in  valuation  of  real  estate. 

(d)  Note  of  a  customer  returned  with  a  protest  charge  from  the  bank 
where  it  had  been  left  for  collection. 

(28)  A  merchant  who  has  been  in  business  for  twenty  years  decides  to 
put  a  valuation  on  the  goodwill  of  his  business  and  carry  same  as  an  asset 
on  his  ledger,  the  entry  being  to  charge  goodwill  and  credit  surplus  An- 
other merchant  five  years  later  buys  the  entire  business  including  the 
goodwill,  and  after  making  a  careful  inventory  finds  that  the  actual  net 
resources  exclusive  of  goodwill,  amount  to  $5,000.00  less  than  the  sum  he 
paid  for  It. 

Discuss  the  subject  of  goodwill  in  respect  to  the  above  cases,  and  state 
the  correct  manner  of  dealing  with  same. 

(29)  Describe  the  use  and  operation  of  a  Clearing  House 

(30)  What  is  meant  by  the  term  "Hire  Agreement"?  Is  there  any 
difference  between  a      Hire  Agreement"  and  a   "Hire  and   Purchase 

Agreement"  ? 

(31)  Differentiate  between  consignments,  adventures,  and  joint  accounts 
How  should  consignments  received,  to  be  realized  for  and  on  behalf  of 
.«^^/..r.  be  best  treated?  How  should  the  manager  treat  joint  trans- 
actions  in  his  books? 

t.hl-f^^  ^T  ^""'l  "\^">/Iasses  are  the  expenses  of  a  manufacturing  es- 
tablishment usually  divided?  Name  5  sub-classifications  of  each  clafs  of 
expenditures. 

(33)  What  are  the  distinguishing  features  of  a 

Mortgage  Bond  \ 

Collateral  Trust  Bond 
Income  Bond 

(34)  Describe  the  usual  method  of  procedure  in  determining  the  net 
profit  or  less  of  a  business  the  books  being  kept  by: 

(a)  Single  entry. 

(b)  Double  entry. 

(35)  What   general   principles   should   be   observed   in   differentiatinir 
between  capital  and  revenue  expenditure? 

181 


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Accounting  Problems  and  Solutions, 

(36)  What  differences  in  books  and  accounts  would  exist  between  a 
partnership  and  an  incorporated  company  carrying  on  a  similar  business? 

(37)  Rule  a  form  of  cash  book  suitable  for  a  charitable  institution. 

(38)  What    is    meant    by    the    term    "depreciation"?      Give    three 
examples  of  its  application. 


Theory  of  Accounts. 

Answers. 

(i)  When  a  government  or  a  corporation  undertakes  to  pay  a  debt  due 
at  a  certain  time,  it  is  necessary  to  do  this  either  by  a  series  of  appropria- 
tions, or  by  setting  aside  out  of  available  cash  periodically  sums  which 
invested,  usually  by  purchasing  its  own  debentures,  or  other  form  of  in- 
debtedness, so  that  at  the  end  of  this  time,  provision  will  be  sufficient  to 
pay  the  debt. 

Dr.  Price  was  the  originator  of  the  idea,  and  he  recommended  it  to  the 
elder  Pitt,  as  a  means  of  paying  off  the  national  debt  of  England.  His  is 
the  idea,  which  has  been  adopted  by  mathematicians,  and  it  may  be  stated 
thus :  Find  such  a  sum,  which  is  to  be  set  aside  periodically,  and  instantly 
made  to  bear  a  fixed  rate  per  cent,  per  period,  the  amount  of  these  invest- 
ments at  the  maturity  of  the  indebtedness  will  exactly  equal  thac  indebted- 
ness. The  term  sinking  fund  is  applied  to  a  sum  periodically  set  aside, 
and  not  to  the  amount  of  the  investments.  The  interest  on  the  debentures 
is  paid  to  the  persons  holding  the  debentures,  whether  outsiders,  or  repre- 
sentatives of  the  corporation. 

The  term  Sinking  Fund  began  to  be  used  after  a  time  in  a  looser  man- 
ner, to  the  amount  of  irregular  sums  set  aside  to  meet  an  obligation,  the 
sums  set  aside  being  invested.  In  this  latter  sense  it  is  a  reserve.  As 
given  above,  it  is  created  to  redeem  a  fixed  liability,  and  is  a  debt  account. 

Later  on,  the  term  began  to  signify  a  fixed  charge  taken  out  of  revenue, 
duly  invested  periodically  at  a  fixed  rate  per  cent.,  to  provide  for  the 
inevitable  fixed  shrinkage  of  certain  assets,  as  in  the  case  of  a  bond  pur- 
chased above  par  to  meet  the  shrinkage  of  the  premium.  The  account  in 
which  the  sinking  fund  with  interest  enters  is  a  credit  account.  The 
creation  of  sinking  funds  requires  such  a  knowledge  of  annuities  as  may 
be  found  in  Prof.  Sprague's  recent  work  on  investments. 

(2)  The  books  of  such  a  corporation  are  kept  by  a  secretary,  and  are : 

1.  Stock  Certificate  Book  for  common  stock,  and  Stock  Certificate 
Book  for  preferred  stock. 

2.  Transfer  Book. 

3.  Stock  Book. 

4.  Stock  Ledger. 

I.  The  Stock  Certificate  Book  is  made  up  of  blank  certificates  of 
stock  bound  together  and  numbered  consecutively,  attached  to  stubs 
from  which  each  one  is  easily  separated  by  perforations.  The  one  for 
common  stock  and  the  one  for  preferred  are  similar,  but  the  numbering  is 
distinct.    On  the  issuing  of  stock  to  the  shareholder,  these  certificates  are 

Ifc 


Answers  in  Theory  of  Accounts. 

filled  in  by  the  secretary  or  other  authorized  person,  and  signed  as  di- 
rected by  the  By-laws.  On  the  back  of  the  certificates  is  a  blank  assign- 
ment, ready  to  be  filled  in  when  the  assignment  is  made.    On  the  stub  of 

original  stock,"  under  the  heading,  « Issued  against  surrendered  cerUfi- 
cate  No.  — '  should  be  entered  "Original  Issue."  The  owner  of  stock 
will  sometimes  sell  a  portion  of  his  stock,  represented  by  the  certificate 
and  m  that  case  the  assignment  wiU  be  filled  out  only  by  the  number  of 
shares  transferred.  The  secretary  would  then  cancel  the  old  certificate 
and  issue  two  new  certificates,  and  deliver  both  to  the  original  owner,  un- 
less he  receives  instructions  to  deliver  them  otherwise.  When  a  transfer 
has  thus  been  made,  the  surrendered  certificate  should  be  canceled,  so  as 
to  render  it  incapable  of  being  again  used. 

2.  The  Transfer  Book  is  made  up  of  a  number  of  blank  assignments. 
They  are  intended  to  be  filled  out  and  signed  by  the  transferrer,  and  are 
the  authority  of  the  secretary  to  issue  new  Stock  Certificates. 

3  and  4.    The  Stock  Book  and  Stock  Ledger  are  practically  one  and  the 
same  in  contents. 

The  La^s  of  the  State  of  New  York  call  for  the  keeping  of  a  Stock 
Book,  which  shall  contain  the  following  elements: 

1.  Names  of  stockholders  arranged  alphabetically. 

2.  Residence  of  stockholder. 

3.  Number  of  shares  held  by  each. 

4.  Time  stock  was  acquired. 

5.  Amount  paid  thereon. 

6.  From  whom  received  and  to  whom  transferred. 

If  we  combine  the  Stock  Book  and  Stock  Ledger,  it  will  contain  the 
following  columns: 

1.  Names  and  residences. 

2.  Date. 

3.  From  or  to  whom  transferred. 

4.  Full  paid  or  what  part  paid. 
5-    Certificate  numbers. 

1.  Taken  out. 

2.  Surrendered. 

6.  Number  of  shares. 

1.  Disposed  of. 

2.  Acquired. 

7.  Balance. 

The  Stock  Certificate  Book  and  Transfer  Book  contain  all  the  infor- 
mation required  for  entry  into  the  Stock  Ledger. 

(3)  I  do  not  regard  the  two  methods  as  conflicting,  but  rather  that  the 
first  method  presents  a  fuller  statement  than  the  second.  It  surely  can 
not  be  a  fault  to  give  extra  information,  provided  that  this  information 
is  of  value.  However,  in  the  Balance  Sheet  the  elements  contained  in  the 
question  should  appear  thus: 

Issue   of   Stock    $50000 

Less   unissued    10,000 

Stock   issued    ^0,000 

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Accounting  Problems  and  Solutions, 

(4)  In  addition  to  the  ordinary  books  used  in  mercantile  houses,  which 
will  vary  according  to  the  nature  of  the  business,  the  following  auxiliary 
books  are  necessary,  in  order  to  properly  record  all  the  transactions 
of  an  Incorporated  Company: 

1  Minute  Book. 

2  Subscription  Book. 

3  Installment  Book. 

4  Installment  Scrip  Book. 

5  Stock  Certificate  Book. 

6  Stock  Ledger. 

7  Stock  Transfer  Book. 

8  Dividend  Book. 

The  Minute  Book  contains  a  record  of  all  the  meetings  of  the  stock- 
holders, also  of  all  the  meetings  of  the  board  of  directors.  This  book  is 
usually  kept  by  the  secretary  of  the  corporation. 

tie  Subscription  book  is  used  for  the  purpose  of  recording  the 
subscriptions  of  stockholders.  It  contains  the  date  of  record,  the  names 
and  addresses  of  subscribers,  the  number  of  shares,  and  the  amount 
subscribed  for  by  each  stockholder. 

The  Installment  Book  is  made  up  from  the  Subscription  Book,  and 
contains  the  name  of  each  subscriber  with  the  amount  paid  on  each 
installment,  a  record  being  kept  with  each  installment. 

The  Installment  Scrip  Book  is  more  or  less  a  receipt  book  for 
mstallments  made.  It  is  a  book  of  blank  receipts  with  stubs,  to  be  filled 
out  and  signed  by  the  secretary  and  treasurer  as  the  installments  are 
paid,  the  receipt  being  given  to  the  subscriber,  and  the  stub  retained 
by  the  secretary.  Upon  the  payment  of  the  last  installment  the  scrip  is 
exchanged  for  certificates  of  stock. 

The  Stock  Certificate  Book  contains  blank  certificates  with  stubs  to 
be  filled  out  and  signed,  usually  by  the  president  and  secretary  of  the 
corporation;  for  convenience  these  certificates  are  numbered  consecu- 
tively. The  stockholder  signs  the  stub  as  a  receipt  when  the  certificates 
are  issued  to  him;  a  transfer  form  is  always  printed  on  the  back  of  the 
certificate  to  facilitate  the  transfer  or  sale  of  stock. 

The  Stock  Ledger  contains  an  account  with  the  capital  stock,  debited 
at  par  value,  and  with  each  stockholder,  credited  for  the  amount  of 
his  stock  at  par  value.  When  stock  is  sold  the  seller  is  debited  and  the 
buyer  credited,  thus  preserving  the  equality  of  the  ledger. 

The  Stock  Transfer  Book  is  used  to  record  the  transfer  of  stock  and 
contains  the  permanent  records,  which  are  finally  posted  to  the  Stock 
Ledger.    The  last  two  books  are  absolutely  required  by  New  York  State 

laws. 

The  Dividend  Book,  or  more  properly,  The  Dividend  Receipt  Book,  is 
used  for  the  purpose  of  recording  each  dividend  declared  and  paid.  It 
contains  a  record  of  each  dividend,  the  shares  held  by  each  stockholder, 
and  the  amount  of  dividend  thereon,  with  the  signature  of  the  stockholder 
as  a  receipt  of  his  dividend. 

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Anszvcrs  in  Theory  of  Accounts. 

(5)  (a)  Fixed  assets  is  a  term  given  to  capital  invested  in  a 
business  in  the  form  of  plant,  machinery,  buildings,  etc.  Fixed  lia- 
bilities is  a  term  given  to  obligations  of  a  concern  which  are  not 
usually  paid  for  a  long  time  to  come,  such  as :  bonds  and  mortgages,  and 
which  are  constant  and  do  not  fluctuate. 

(b)  Current  assets  is  a  term  given  to  assets  which  may  be^-*^ -^"^Mssi^ii 
sold  or  realized  without  interfering  with  the  plant  of  a  business  or  its  -  -  * 
operations,  such  as:  Goods,  Accounts  and  Notes  Receivable,  etc.  The 
current  assets  form  the  working  capital  of  a  business.  Current 
liabilities  is  a  term  given  to  claims  of  creditors  which  will  have  to 
be  met  within  a  short  period  of  time,  such  as:  Accounts  and  Notes 
Payable  or  Bank  Overdrafts. 

(6)  Merchandise  account  is  a  term  given  to  an  account  show- 
ing for  a  given  period  the  transactions,  connected  with  goods,  which 
have  taken  place  during  the  period.  As  ordinarily  kept,  the  debit  side 
contains:  stock  on  hand  at  the  beginning  of  the  period,  purchases  during 
the  period,  and  merchandise  returned  by  customers;  the  credit  side  con- 
tains :  sales  made  to  customers,  merchandise  returned  to  creditors  during 
the  period,  and  the  amount  of  stock  on  hand  at  the  end  of  the  period, 
the  latter  being  added  to  this  side  when  closing  the  books.  If  kept  in 
this  old  fashioned  way  the  account  is  hardly  classifiable,  in  fact  we  may 
say  it  is  no  account  at  all,  because  we  cannot  get  a  resultant  from  it. 
The  true  way  is  to  keep  three  accounts,  namely :  Merchandise,  Purchases, 
and  Sales.  The  first  to  represent  the  Inventory  at  the  beginning,  and 
hence  an  asset,  the  second  to  represent  additions  to  the  asset,  i.  e.,  the 
debit  side,  to  show  Gross  Purchases  and  the  credit  side  to  show  Returns, 
the  resultant  would  be  the  Net  Purchases,  which  would  be  carried  to  the 
Merchandise  Account  (Inventory).  The  Sales  Account  would  be  equal- 
ized in  the  same  way  to  show  the  result  which  we  would  call  Net  Sales. 
In  this  way  each  balance  is  a  definite  resultant,  and  can  be  used  for 
statistical  purposes. 

(7)  (a)  The  purpose  of  a  sinking  fund  account  is  to  show  the 
amount  set  aside  out  of  net  profits,  to  provide  for  the  repayment 
of  loans  falling  due  at  some  future  time.  It  is  created  on  the  books  by 
debiting  Net  Profit  Account  and  crediting  Sinking  Fund  Account,  but 
as  the  fund  is  invested  another  entry  is  made  whereby  Cash  is  credited 
and  Sinking  Fund  Investment  Account  is  debited.  Income  derived  from 
such  investments  must  be  debited  to  Cash  and  credited  to  Sinking 
Fund  Account  and    then  again  reinvested. 

(b)  The  purpose  of  a  Reserve  Fund  is  to  show  the  amount  set  aside 
to  meet  contingencies.  It  is  created  on  the  books  by  debiting  Reserve 
Fund  and  crediting  Cash  Account. 

(c)  The  purpose  of  a  depreciation  account  is  to  show  the 
amount  set  aside  out  of  profits  for  the  maintenance  or  replacement  of 
assets  when  such  replacement  is  required  by  the  circumstances  of  the 
case.  The  effect  of  charging  against  revenue  a  provision  for  depre- 
ciation is  to  retain  in  the  business  a  certain  amount  of  assets,  which  in 

185 


;« 


t 


1 


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A': 


Accounting  Problems  and  Solutions. 

the  course  of  time  will  replace  assets  that  have  depreciated.  It  is  created 
on  the  books  by  a  charge  against  revenue,  which  is  credited  to  the 
Depreciation  Account  (or  to  the  asset  itself). 

(d)  The  purpose  of  a  Goodwill  account  is  to  show  the  amount 
paid  by  the  Vendee  to  the  Vendor  for  the  reputation  and  connections  of 
the  established  concern.  It  is  created  on  the  books  by  a  charge  to 
Goodwill  along  with  Sundry  Assets  and  credited  to   Sundry  Liabihties. 

(8)  Preferred  Stock  and  Common  Stock.  The  former  entitles  the 
holders  to  a  fixed  rate  of  dividend  out  of  the  profits  before  the  common 
stockholders  can  receive  any  at  all;  it  may  be  cumulative  or  non-cumula- 
tive, that  is,  the  dividend  may  become  a  charge  against  profits  for  the  next 
fiscal  period,  if  not  earned  in  one  fiscal  period,  or  the  dividend  may  merely 
be  passed,  no  liability  being  created. 

The  circumstances  which  give  rise  to  Preferred  Stock  are  varied,  and 
are  generally  based  upon  equity.  Thus  a  corporation  may  be  distressed 
for  money,  and  to  relieve  the  company  certain  stockholders  may  advance 
the  money  needed,  for  which  they  receive  Preferred  Stock.  It  may  also  be 
issued  in  the  re-organization  of  a  corporation  for  the  purpose  of  obtaining 
working  capital  to  carry  on  the  company's  business. 

The  latter  (Common  Stock)  is  the  ordinary  share  capital  of  a  corpo- 
ration and  entitles  the  holder  to  a  share  in  the  profits  in  the  form  of 
dividends  that  are  declared  by  the  directors  of  the  corporation. 

(9)  "  A  Balance  Sheet  is  a  concise  statement  compiled  from  the  books 
of  a  concern  which  have  been  kept  by  double  entry,  showing  on  the  one 

side  all  the  liabilities,  and  on  the  other  side  all  the  assets  of  a  con£ern  at  1 

a  particular  moment  of  time."     (Lisle.)  O^  ^^Ws  *  S-^^  X^JkA  ^  v»X^  oCVi^'^^ 

A  Statement  of  Assets  and  Liabilities  deals  with  the  same  subjects, 
but  may  be  compiled  from  any  data,  not  necessarily  from  books.  The 
latter  is  the  proper  title  under  which  the  resources  and  liabilities  of  a 
concern  whose  books  have  been  kept  by  single  entry,  might  be  arranged. 

(10) 
Dr.  CASH  BOOK 190 Cr. 


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Anszvers  in  Theory  of  Accounts. 

(II) 

JONES  &  COMPANY. 

^° $i'500  By  Draft  and  discount $1,500 

«   o°f"  "J'J"J" 500     "  Cash,  part  of  loan ^ 

Returned  draft 1,500  '^^ 

(12) 

The  prmciples  of  double  entry  bookkeeping  are  as  follows : 

As  every  business  transaction  is  a  transfer  of  money  or  its  equivalent 
and  has  a  twofold  effect,  diminishing  and  increasing,  consequently  it 
requires  an  entry  to  show  both,  the  increase  and  the  decrease. 

When  all  the  accounts  are  correctly  posted  there  is  an  equilibrium 
between  debits  and  credits,  thus  affording  a  proof— by  taking  a  Trial 
Balance— as  to  the  mathematical  accuracy  of  the  posting. 

The  results  exhibited  can  be  verified,  as  all  sources  of  Profit  or  Loss 
are  kept  under  properly  classified  accounts,  and  the  final  showing  has  to 
agree  with  the  result  shown  in  the  Balance  Sheet. 

There  are  hardly  any  principles  to  speak  of  in  Single  Entry;  it  deals 
simply  with  personal  book  accounts,  while  nominal  or  real  accounts  are 
omitted,  and,  of  course,  there  can  be  no  equilibrium.  The  profit  or  loss 
can  only  be  ascertained  by  a  comparison  of  the  assets  and  HabiHties 
of  one  period  with  those  of  another  period.  The  excess  of  the  one  over 
the  other  shows  the  profit  or  loss.  The  result,  however,  cannot  be 
verified.  ,     , 

(13) 

B's  Journal. 
Have  this  day  drawn  on  A,  for  $1,000  at  60  days. 

Notes    Receivable    $j 

To  A  -. 

I' or  60  days  draft  accepted  by  the  latter  in  our  favor. 

B's  Cash  Book  (Debit  side). 

Notes  Receivable,  Discounted,  A'7     ''^°*  ^'''''**    ^^"^  ^^^^^''• 

60  days  acceptance   $990.50  $9.50  $1,000 

A  Trial  Balance  is  a  statement  of  the  Ledger  accounts  prepared  after 
the  books  of  a  concern  have  been  posted  up,  but  before  the  closing 
entries  are  made,  showing  in  two  parallel  money  columns  either  the  total 
of  the  debit  and  the  credit  side  of  each  ledger  account,  or  the  difference 
between  the  debit  side  and  the  credit  side  of  each  ledger  account" 
(Lisle.) 

The  purpose  of  a  Trial  Balance  is  primarily  to  test  the  equiUbrium  of 
the  ledger,  which,  although  not  proving  the  absolute  correctness  of  the 
ledger,  is  essential  to  such  correctness,  and  is  the  first  step  to  closing  the 
books  and  preparing  the  business  and  financial  statements. 

"A  Balance  Sheet  is  a  concise  statement  compiled  from  the  books  of 
a  concern  which  have  been  kept  by  double  entry,  showing  on  the 
one  side  all  the  liabilities  and  on  the  other  side  all  the  assets  of  a  concern 
at  a  particular  moment  of  time"  (Lisle). 

187 


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Accounting  Problems  and  Solutions. 

Its  purpose  is  to  ascertain  and  show  the  financial  condition  of  the 
concern  at  the  time.  It  contains  therefore  the  same  accounts  that  appear 
on  the  Trial  Balance  at  the  beginning  of  the  next  fiscal  period  after  all  the 
nominal  accounts  have  been  closed,  but  they  are  classified  and  arranged 
in  such  an  order  as  to  give  the  clearest  possible  expression  to  the  results 

exhibited. 

A  Statement  of  Affairs  is  a  summary  of  the  assets  and  liabilities  of 
an  insolvent  concern,  and  is  so  arranged  as  to  show  nominal  or  book 
values  of  the  assets  and  also  the  amounts  they  are  expected  to  realize, 
as  well  as  the  nominal  liabilities  and  how  they  are  expected  to  rank. 
Preferred  claims  are  deducted  from  the  assets,  and  the  excess  of  the 
liabilities  over  the  assets  is  the  amount  of  deficiency.  This  statement  is 
generally  accompanied  by  a  "  Deficiency  Account "  which  is  supposed  to 
account  for  the  deficiency  shown  by  the  Statement  of  Affairs.  The  latter 
is  prepared  for  the  purpose  of  ascertaining  and  exhibiting  the  true  con- 
dition of  an  insolvent  concern  with  reference  to  realization,  and  the 
measure  of  the  deficiency  with  respect  to  liquidation.  A  statement  of 
affairs  may  also  be  prepared  by  a  solvent  concern,  showing  condition  of 
business  where  the  books  were  kept  by  single  entry. 

A  Trading  Statement  is  prepared  to  show  gross  profit  on  trading;  it 
is  generally  the  first  section  of  a  Profit  and  Loss  Account,  being  charged 
with  the  inventory  on  hand  at  the  commencement,  purchases  and  any 
direct  expenditures  on  the  acquisition,  such  as:  freight  (inward),  duty, 
etc..  and  it  is  credited  for  sales  and  inventory  at  closing  period,  the  bal- 
ance, e.  g.,  the  excess  of  the  amount  credited  for  goods  sold,  over  the 
amount  charged  for  acquisition,  is  the  gross  proht. 

(IS) 
The  modern  practice  for  keeping  a  Merchandise  Account  is  to  sub- 
divide it  into  three  sections,  viz.:  Merchandise  (Inventory),  Purchases, 
and  Sales.  The  proper  use  of  these  divisions  is  as  follows:  The  Mer- 
chandise (Inventory)  is  to  contain  (on  the  debit  side)  balance  at  com- 
mencement, as  well  as  net  purchases ;  on  the  credit  side  net  sales,  at  cost, 
and  the  inventory  at  closing  period.  Purchases  is  to  contain  (on  the 
debit  side)  goods  bought  during  the  period  under  review,  and  (on  the 
credit  side)  goods  returned,  the  difference  representing  net  purchases,  or 
an  increase  of  assets  and  hence  being  carried  to  the  debit  side  of  Mer- 
chandise (Inventory)  section.  The  Sales  section  is  credited  with  Sales 
and  charged  with  returns,  the  net  sales  being  earned  down;  against 
these  net  proceeds  is  entered  the  cost  of  goods  sold  (on  the  debit  side), 
the  final  balance  shows  the  profit  made.  (Advocated  by  Professor 
Sprague  in  his  Philosophy  of  Accounts.) 

(i6) 
a     Reserve  Account  is  a  term  given  to  a  sum  set  aside  to  meet  depre- 
ciation of  propertv,  or  to  provide  for  loss  upon  bad  debts,  and  is  created 
on  the  books  by  charging  revenue  and  crediting  the  Reserve  Account. 

b.    Reserve  Fund  is  a  term  given  to  the  fund  set  aside  m  cash  to  meet 
all  possible   contingencies. 

i88 


Ansii'crs  in  Theory  of  Accounts. 

c.  The  term  Income  and  Expenditures  is  given  to  an  account  kept  by 
a  concern,  not  conducted  for  profit,  and  is  similar  to  what  is  called  in  an 
ordinary  trading  concern  Profit  and  Loss  Account. 

d.  Receipts  and  Disbursements  refer  to  a  summarized  Cash  Account, 
showing  on  the  debit  side,  properly  analyzed,  under  appropriate  headings, 
the  total  money  received  during  the  period  embraced  by  the  account. 
The  credit  or  payment  side  shows  the  cash  disbursed  during  the  period 
to  which  the  account  relates.  The  statement  shows  the  balance  of  cash 
on  hand  at  the  beginning  as  well  as  at  the  close  of  the  period.     (Lisle.) 

e.  Good-will  is  that  intangible  quality  of  patronage  that  attaches  to  an 
established  business  and  is  presumed  to  attach  to  it  regardless  of  change 
of  ownership.  It  is  a  legitimate  asset;  its  value  depending  on  many  cir- 
cumstances, such  as  location,  duration  of  lease,  annual  profits,  etc.  In 
some  instances  it  is  allowed  to  stand  on  the  books  at  what  it  cost;  in 
other  instances  it  is  gradually  written  off.  In  the  case  of  corporations, 
it  is  best  to  write  it  off;  regarding  it  not  as  a  permanent  asset  of  the 
corporation,  but  as  a  part  of  the  cost  of  acquiring  the  assets,  a  premium 
paid  on  them  to  be  distributed  over  a  number  of  years.     (Rahill.) 

f.  Income  Bonds  is  a  term  given  to  securities  issued  against  the 
surplus  income  of  a  corporation  as  security,  after  fixed  charges  have  been 
paid.  Usually  physical  property  is  also  mortgaged  as  additional 
security,  especially  is  this  the  case  at  a  reorganization  when  stockholders 
respond  to  cash  assessments. 

(17) 
Repairs  and  renewals  should  be  charged  to  Profit  and  Loss  and  not  ^'t***- 
against  Reserve  Account.     Dicksee,  in  his  "  Advanced  Accounting,"  de-  - 
fines  Depreciation  as  follows :     "  It  is  necessary,  in  addition  to  charging  ' 
actual  expenditure  upon  repairs  and  replacements  to  revenue,  to  charge  , 
against  the  Revenue  Account  of  each  year  a  further  sum,  with  a  view  to  I 
(as  far  as  possible)  averaging  the  expenditure  on  Revenue  Account  over 
a  term  of  years  and  that  provision  which  it  is  so  necessary  to  charge  is     .  .,>. 
usually  called  by  the  name  of  *  Depreciation.' "     This  definition  makes  it 
quite  clear  that  ordinary  repairs,  necessary  to  maintain  the  property  in  a 
condition  to  earn  revenue,  should  be  charged  to  Profit  and  Loss,  because, 
if  they  are  charged  against  the  Depreciation  Reserve  Account,  the  reserve 
is  depleted  and  the  wear  and  tear  of  the  property  remains  unprotected. 

(i8) 

The  term  "  Secret  Reserve "  is  applied  to  a  reserve,  created  by  mak- 
ing charges  against  revenue  which  are  unnecessary,  and  which  reserve 
does  not  appear  upon  the  book  accounts,  and  either  inflates  the  liabilities 
or  undervalues  the  assets. 

As  examples  of  Secret  Reserves  may  be  stated:  Appreciation  of  real 
estate  not  shown  on  the  books,  or  the  value  of  same  may  be  carried  at  a 
nominal  and  not  real  figure;  stock  which  has  been  "taken  low"  may  be 
written  up;  excessive  provision  for  bad  and  doubtful  debts  may  be 
made,  etc. 

It  is  rather  difficult  to  give  an  exact  opinion  as  to  the  propriety  or 

189 


'i%,.*-»j-ii 


I.'  * 


1 


•i! 


Accounting  Problems  and  Solutions, 

impropriety  of  a  Secret  Reserve;  considering,  however,  the  many  abuses 
to  which  such  a  reserve  is  liable,  one  would  think  it  improper,  because, 
unless  the  utmost  confidence  can  be  placed  in  the  managers,  there  is 
great  risk.  Subordinates  can  be  induced  to  certify  false  valuations  of 
assets,  for  the  benefit  of  principals,  by  alleging  that  it  is  necessary  to 
write  up  this  asset,  and  that  the  "  Secret  Reserve "  will  cover  it,  while 
as  a  matter  of  fact  the  "  Reserve  "  may  not  exist  any  longer. 

(19) 

By  the  "Voucher  System  of  Bookkeeping"  is  meant  a  plan  by  the  use 
of  which  the  keeping  of  accounts  with  creditors  whose  invoices  are 
promptly  settled  is  avoided.  The  voucher  has  appended  the  invoice  and 
at  the  same  time  a  receipt  for  the  pa3rment  of  the  account  as  well  as  a 
classification  of  the  accounts  to  which  it  should  be  charged. 

Where  the  Voucher  System  of  Bookkeeping  is  used  a  "Voucher  Rec- 
ord Book"  is  kept.    This  book  contains  columns  for  the  following: 

Date,  Voucher  No.,  Name  of  Creditor,  For  What,  Folio,  Personal 
Accounts,  Terms,  Date,  Amount  and  Mode  of  Payment,  Distribution  of 
Items,  Total,  and  Sundries.  /^qN 

There  are  two  methods  by  which  the  loss  or  gain  of  a  business  may 
be  determined,  namely:  The  Resource  and  Liability  method,  and  the 
Loss  and  Gain  method.  By  the  former  the  loss  or  gain  is  found  by  a 
comparison  of  the  condition  of  the  Resources  and  Liabilities  of  one  period, 
with  their  condition  at  another  period;  if  the  Resources  have  increased, 
and  the  Liabilities  remain  unchanged,  or  if  the  Liabilities  have  decreased, 
and  the  Resources  remain  stationary,  the  result  will  show  a  gain,  other- 
wise a  loss.  By  the  second  method  we  consider  each  item  of  loss  or  gain 
(shown  by  the  nominal  accounts)  and  determine  the  profit  or  loss  on 
each  account  separately. 

The  Resource  and  Liability  method  would  be  the  method  adopted  to 
determine  the  loss  or  gain  of  a  business  whose  books  were  kept  by  single 
entry,  the  Loss  and  Gain  method  would  be  the  form  used  to  determine 
the  loss  or  gain  of  a  business  whose  books  were  kept  on  the  double  entry 
principle.  (31) 

Net  profit  is  a  term  given  to  the  net  result  shown  on  a  Profit  and 
Loss  Account,  and  arrived  at  after  charging  up  all  expenses,  including 
Interest,  Depreciation,  etc. 

In  the  case  of  a  partnership  the  net  profit  is  disposed  of  by  being 
credited  to  the  partners'  respective  Drawing  Accounts,  from  which  it  is 
carried,  after  deducting  withdrawals,  to  the  Capital  Accounts.  In  the 
case  of  a  corporation  it  is  carried  to  a  Surplus  Account,  while  in  banks 
and  other  financial  institutions  this  account  is  called  "Undivided  Profits.'^ 

(22) 

A  Stock  Ledger  is  an  auxiliary  book  designed  to  show  the  amount  of 
the  individual  holdings  of  a  corporation.  Whenever  stock  is  issued  it  is 
posted  from  the  stock  certificate  book  to  the  credit  of  the  respective 
individual  accounts.    It  is  advisable  to  have  a  Capital  Stock  Account  and 

190 


Answers  in  Theory  of  Accounts. 


to  debit  same  for  stock  issued.  When  stock  is  sold  by  a  former  holder, 
the  seller  is  debited  and  the  buyer  credited,  thus  preserving  the  equality 
of  the  ledger.  It  has  no  direct  connection  to  the  general  books  except 
furnishing  the  names  and  the  amounts  of  stock  held  by  stockholders,  the 
total  of  which  must  be  the  same  as  the  amount  credited  to  the  Capital 
Stock  account  in  the  General  Ledger. 

While  there  are  various  forms  of  stock  ledgers,  yet  the  nature  of  the 
records  and  the  modus  operandi  will  be  best  illustrated  by  an  example. 


Dr. 


(From  Kcister's  Corporation  Accounting.) 
FORM  OF  STOCK  LEDGER 


Or. 


Date 


Certificates 


<_   CO 

O  £> 


Par  Value 


Date 

Certificates 

Install- 
ments 


Par 
Value 


(23) 

a.  In  addition  to  the  ordinary  books  of  account,  which  will  vary 
according  to  the  nature  of  the  business,  the  corporation  will  require  the 
following  auxiliary  books: 

1.  Minute  Book. 

2.  Subscription  Book. 

3.  Installment  Book. 

4.  Installment  Scrip  Book. 

5.  Stock  Certificate  Book. 

6.  Stock  Ledger. 

7.  Stock  Transfer  Book. 

8.  Dividend  Book. 

The  three  forms  referred  to  in  this  question  could  probably  be: 
common  stock,  preferred  stock,  and  guaranteed  stock.  All  forms  of 
capital  stock  are  created  by  the  receipts  of  funds  from  the  subscribers  to 
the  stock  with  which  to  finance  the  company,  and  in  lieu  of  which  cer- 
tificates of  capital  stock  are  issued.  The  holders  of  common  stock  have 
the  right  to  vote  and  receive  profits  in  the  form  of  a  dividend,  declared 
by  the  board  of  directors. 

Preferred  stock  differs  from  the  common  stock  in  that  a  certain  pref- 
erential dividend  is  to  be  paid  upon  it  before  any  dividend  can  be  paid 
upon  the  common  stock.  The  holder  of  this  form  of  capital  stock  has  the 
right  to  receive  dividends  out  of  profits,  which  dividends,  according  to  the 
form  of  stock,  may  be  cumulative  or  non-cumulative. 


r. 


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Accounting  Problems  and  Solutions. 

Guaranteed  Stock  is  practically  the  same  as  "  cumulative  stock."  It  is 
a  form  of  stock  on  which  a  certain  dividend  is  guaranteed,  and  which 
dividend  must  be  paid  before  any  other  dividends  are  paid.  The  holder 
of  this  form  of  stock  has,  however,  no  claim  against  the  assets  of  the 
company,  but  on  profits. 

(24)  The  arrears  of  dividends  should  not  appear  among  the  liabilities 
of  the  balance  sheet.  A  corporation's  liability  for  dividends  on  preferred 
cumulative  stock  is  contingent  on  their  being  earned,  but  not  against  the 
assets  of  the  company.  It  is,  however,  advisable  that  the  attention  be 
drawn  by  a  foot  note  in  the  balance  sheet.  This  procedure  is  adhered  to 
in  order  to  protect  prospective  common  stock  purchasers,  who,  by  a 
suppression  of  such  facts,  may  find  themselves  at  a  disadvantage. 

(25)  By  opening  an  account  merchandise  or  merchandise  inventory  and 
debiting  to  this  account  all  goods  on  hand.  Theoretically,  this  practice 
is  incorrect,  for  as  Professor  Sprague  states  in  his  "  Philosophy  of  Ac- 
counts " : 

An  Account  which  needs  to  be  made  over  is  one  which  ought  to  have 
been  made  differently  at  first. 

If  we  add  the  inventory  to  the  credit  side  of  what  we  call  "  Merchandise 
Account"  we  are  mixing  different  elements  into  one  mass,  and  have  to 
rearrange  things  to  get  at  the  result. 

The  modern  practice  is  to  separate  the  merchandise  account  into  three: 
Merchandise  (inventory),  sales,  and  purchases. 

The  arrangement  would  be  to  debit  the  merchandise  (inventory)  ac- 
count for  balance  of  merchandise  on  hand  at  the  beginning  of  the  period. 
Purchases  made  and  returns  by  us  would  be  respectively  debited  or  cred- 
ited to  the  Purchase  account.  Sales  made  and  returns  to  us  would  be 
respectively  credited  or  debited  to  the  Sales  Account.  The  Purchase 
account  would  then  be  closed  into  the  merchandise  (inventory)  account, 
leaving  only  two  accounts,  merchandise  (inventory)  and  sales.  By 
subtracting  from  the  debit  side  of  the  merchandise  account  the 
inventory  on  hand  we  arrive  at  the  cost  of  goods  sold.  This  merchandise 
account  we  then  close  by  journal  entry  Sales  to  Mdse.  The  debit  side  of 
the  sales  account  contains  then  the  actual  net  cost  of  goods  sold,  while 
the  credit  side  contains  net  proceeds  of  sales,  the  difference  representing 
the  profit  made.    (Advocated  by  Prof.  Sprague.) 

(26)  In  the  first  place  we  must  distinguish  between  valuing  an  inventory 
for  the  purpose  of  finding  its  value  as  an  asset,  and  the  valuing  of  it,  for 
the  purpose  of  showing  profits  made  or  loss  sustained  during  a  given 
period.  .    .  . 

It  is  wrong  in  principle  to  value  it  at  market  price  as  it  interferes  with 
the  correct  showing  of  the  profit  and  loss  account.  If  we  take  the  in- 
ventorv  tor  any  reason,  not  for  the  purpose  of  rendering  a  correct  profit 
and  lo<.  account  for  any  given  period,  we  are  at  liberty  to  use  either  form, 
cost  or  market  value,  but  when  we  take  inventory  for  the  purpose  of  ascer- 

192 


Answers  in  Theory  of  Accounts. 

taining  the  cost  of  sales,  for  the  purpose  of  showing  a  correct  profit  and 
loss  account,  we  must  figure  it  at  cost  price  only. 

(27) 

(a)  Real  Estate 

Interest  advanced 

To  Notes  Payable 
(with  proper  and  sufficient  explanation) 

(b)  Cash 

To  Buildings 
Fixtures 
Merchandise  (sales) 

(with  proper  and  sufficient  explanation) 

(c)  Increase  in  valuation  should  not  be  taken  into  consideration  at  all. 
Sometimes,  however,  the  increase  is  of  a  permanent  nature,  and  not 
desiring  to  have  a  secret  reserve  it  is  shown.  In  such  case  the  entry 
should  be : 

Real  Estate 

To    Reserve    (of   some   nature) 
It  is  not  advisable  to  credit  it  to  surplus  account  directly. 

It  is  quite  usual,  where  notes  are  left  for  collection,  not  to  have  them 
credited  until  collected.  In  this  case  we  would  debit  the  customer  and 
credit  cash  for  protest  charges  only. 

I 

(28)  The  absurdity  of  the  first  instance  is  perhaps  well  illustrated  in 
the  case  of  Stewart  v.  Gladstone  where  the  presiding  Justice  decided  that 
the  clause  "  all  particulars  that  might  be  susceptible  of  valuation  should  be 
stated  in  ihc  ai.nual  accounts"  does  not  comprise  goodwill.  This  intangi- 
ble asset  has  only  a  value  when  the  business  is  sold. 

With  regard  to  the  other  case,  where  the  merchant  overpaid  for  the 
goodwill,  the  sum  which  he  overpaid  is  to  be  written  off.  This  may  be 
done  in  one  sum  or  distributed  for  a  period  of  say,  two  or  three  years. 

(29)  The  Clearing  House,  though  its  connection  with  other  clearing 
houses,  unites  all  ihr  banks  of  the  city  and  of  the  country  into  one  bank. 
By  means  of  the  clearing  houses  and  the  check  system  the  community  is 
enabled  to  transact  the  bulk  of  its  business  without  the  risk  or  annoyance 
of  the  handhng  of  actual  money  to  any  great  extent.  If  we  consider  that 
in  New  York  City  alone  the  daily  clearings  of  checks  will  approximately 
average  over  $150,000,000.00,  we  can  readily  perceive  the  advantages  that 
the  Clearing  House  affords.  Formerly  each  bank  was  obliged  to  settle 
with  each  other  bank,  this  often  required  the  carrying  of  large  sums  of 
money  by  messengers.  Now  the  settlements  of  the  debtor  banks  are 
made  to  the  Clearing  House,  and  the  Clearing  House  settles  the  credit 
balances.  These  settlements  are  now  made  in  Clearing  House  gold  cer- 
tificates, gold  coin  and  United  States  notes,  in  all  of  our  large  cities.    In 

193 


%- 


i|»^   -V' 


Accounting  Problems  and  Solutions. 


New  York  the  payments  are  nearly  all  made  in  clearing  house  gold  cer- 
tificates, representing  gold  coin  on  deposit  in  the  Clearing  House  vaults. 

In  addition  to  this  convenience  the  Clearing  House  fills  another  very 
important  place.  By  the  frequent  bringing  together  of  the  officers  of  the 
hanks  important  financial  questions  are  discussed  to  the  benefit  of  all. 

By  their  systems  of  records  of  all  clearings,  by  the  recording  of  -Aorn 
staicments  of  the  various  banks,  and  by  their  powers  to  examine  any  bank 
which  IS  a  member  of  the  association,  a  very  close  watch  is  kept  upon  the 
condition  of  each  bank.     In  various  financial  crises  the  clearing  houses 
have  proved  themselves  of  inestimable  value.     The  expenses  of  running 
the  clearing  houses  are  generally  paid  from  a  fund  raised  by  an  assess- 
ment upon  the  banks  which  varies  in  different  cities.    In  New  York  all 
members  pay  an  entrance  fee  in  proportion  to  their  capital,  the  sum  rang- 
ing from  $5,000.00  to  $7,500.00.  In  Philadelphia  each  bank,  upon  becoming 
a  member,  is  obliged  "to  deposit  securities  with  the  Clearing  House  in  pro- 
portion to   its   capital,   as   collateral   for  its   settlements.     Each   bank   is 
characterized  by  a  number,  known  as  the  clearing  house  number,  which 
number  is  used  on  all  checks  that  the  bank  presents  for  clearing,  as  well 
as  on  all  clearing  house  blanks. 

The  books  of  record,  kept  by  clearing  houses  in  general,  are :  Ledgers, 
statement  books,  and  registers.  In  the  ledgers  are  kept  accounts  with  each 
bank  to  which  are  posted  daily  all  the  amounts  entered  on  the  proof  sheet. 
Statement  books  are  divided  into  weekly  and  quarterly  and  are  made  up 
from  the  statements  of  each  bank.  In  the  registers  is  kept  a  record  of  the 
balances  paid  to  or  received  from  the  banks  in  settlement  of  daily  ex- 
changes, and  also  the  kind  of  money.  There  are  also,  of  course,  record 
books  of  the  several  committees,  and  the  few  necessary  books  (;f  the 
clearing  house.     (Based  on  Barrett's  Modern  Banking  Methods.) 

(30)  While  the  two  terms  are  synonymous  there  is  a  distinction  with 
regard  to  the  legal  part  of  the  different  agreements. 

Dicksee  makes  no  distinction  whatever  between  a  "  Hire  "  or  '*  Hire 
and  Purchase  Agreement".  In  fact  throughout  all  of  his  books  he  calls  it 
**Hire  and  Purchase  Agreement"  and  defines  it  as  follows: 

"  The  general  nature  of  a  contract  of  this  description  is  that,  if  the 
'tenant'  (the  hirer)  makes  the  necessary  periodical  payments  regularly, 
the  manufacturer  agrees  to  hand  over  the  ownership  of  the  articles  in 
question  to  him,  at  the  end  of  the  prescribed  term  upon  the  payment 
of  a  further  nominal  sum." 

As  a  matter  of  account  this  definition  is  very  correct  and  no  further 
distinction  is  necessary.  From  a  legal  point  of  view,  however,  there  is 
quite  a  difference.  Dawson  in  his  "Accountant's  Compendium,"  differ- 
entiates between  the  two  terms  as  follows: 

"  Under  a  hiring  agreement  no  property  in  the  goods,  so  hired,  passes 
to  the  hirer,  but  under  a  'Hire  and  Purchase  Agreement'  a  distinction 


194 


Answers  in  Theory  of  Accounts. 

■nm- 

must  be  drawn  between  those  which  involve  an  agreement  to  buy,  and 
those  which  do  not.  There  is  an  agreement  to  buy,  if  the  hirer  is  bound 
to  pay  the  whole  of  the  agreed  sums  for  hire,  whether  he  returns  the 
subject-matter  before  the  expiration  of  the  agreed  period  or  not." 

(31)  There  are  two  classes  of  consignments,  namely:    Inward  or  out- 
ward.   Consignments  inward  may  be  for  the  merchant's  own  account,  or 
toey  mav  he  on  the  account  of  another.    In  the  former  the  merchant  is 
the  principal  in  the  latter  he  acts  as  agent.    Consignments  outward  are 
chiefly  on  account  of  the  consignor. 

Consignments  for  a  merchant's  own  account  are  more  properly  termed 
Adventures.  Similarly,  transactions  in  which  the  merchant  is  a  co- 
partner with  others,  are  termed  Joint  Accounts  or  Ventures. 

Consignments  received  to  be  realized  for  and  on  behalf  of  another  arc 

best  treated  as  follows : 

* 

On  receipt  of  the  goods  no  entry  is  made  in  the  books  of  account,  with 
the  exception  of  a  memorandum.  All  charges,  however,  paid  on  the  con- 
signments are  entered  to  the  debit  of  a  "  General  Consignment  Account," 
to  which  account  would  also  be  charged  advances  made  to  the  consignor. 
All  sales  are  to  be  credited  to  a  "  Consignment  Sales  Account."  When 
the  consignee  renders  an  account  sales,  the  "Consignment  Sales  Account" 
is  charged  for  outlay  and  net  proceeds,  while  the  "  General  Consignment 
Account "  is  credited  for  charges  and  advances  transferred,  the  net  pro- 
ceeds being  credited  to  the  "Consignor's  Account."  Joint  transactions 
are  best  treated  by  the  manager  in  one  of  the  two  ways : 

(o)  To  open  an  account  under  the  heading  "  Joint  Adventure  to ,*• 

and  to  charge  it  with  total  cost,  including  all  incidentals.  This 
account  to  be  credited  with  the  gross  amount  realized ;  the  balance, 
if  any,  to  be  transferred  to  "  Profit  and  Loss  Account "  and  the 
partner's  personal  account  for  the  respective  shares  of  loss  or  gain. 

(t)  To  open  an  "  Adventure  Account "  for  the  manager's  share  of  cost, 
and  for  partner's  share  of  costs,  and  to  divide  gross  proceeds  after 
realization  in  the  same  manner.  (Advocated  by  G.  E  Stuart 
Whatley.) 

(32)  The    expenses    of   a   manufacturing   establishment   are   usually 
divided  into  three  classes,  viz.: 

"Manufacturing   Expenses,"   "Selling   Expenses,"  and   "General   Ex- 
penses "  or  "  General  and  Administrative  Expenses." 

Five  sub-classifications  of  manufacturing  expenses  arc : 
(a)  Maintenance  of  real  estate,  or  rent  of  factory. 
ib)  Power,  light,  and  heat, 
(r)  Depreciation, 
(rf)  Repairs. 
(<?)  Labor. 


■]\ 


105 


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I; 


Accounting  Problems  and  Solutions. 

Five  sub-classifications  for  selling  expenses,  are : 

(a)  Advertising, 
(o)  Commissions. 

(c)  Salesmen's  salaries. 

(d)  Shipping  department  expenses. 

(e)  Freight  outward- 
Five  sub-classifications  of  general  and  administrative  expenses,  are: 

(a)  Officer's  salaries. 

(6)  Office  salaries. 

(c)  Office  supplies. 

Id)  General  postage. 

(e)  Telephone  and  telegrams. 

IS  reqmred.  .f ^'^^^/f.^/^^^.^^^^'bond  is  one  secured  on  property  upon 
:i.::^%re"r„o^"rnroWatio„  .  .  .  .r.  .o««a«e  bond. 
Otherwise  it  is  a  second  or  third  respectively.  ^   ^ 

The  di..n.u.hin.  features  of  -^^1^^ to:pt"  ^  TwTed 
by   conateral-usually  stocks   and  ^-j     °f  ^her  ^^  ^P  ^^^^^.^^^  ^.  ^ 

by  the  issuing  corporation.     ^^^"^  ^°''*'  „   ^^e   conditions   of   the 

a  trustee  under  an  agreement  setting  tortn  an 

u     ^  -o  o  liVti  on  the  net  income,  but,  unless  profits  are 
An  income  bond  is  a  lien  o«/*^^  ""'  company.    Income  bonds 

rt  ;'rr-:'.;".:r:i^"«  »„;.»..  -. ...... 

may  be  secured  or  unsecured. 

The  different  results  shown  will  discose  a  ,o  s  or  a  ga  „^^^^^^^._^^  .„ 
„  .be  Kesourc-nd  Liabimv  ^^^g  rl  for  determining  proht  or 
l"^: -"at  St  hysinSe  entry,  P-ided  complete  capital  accounts  have 

^"^  ^^^* ''  ,  „f  ,-,:„  as  at  the  close  of  the  period,  and  so 

196 


Answers  in  Theory  of  Accounts. 

or  capital  accounts,  if  the  business  is  a  partnership,  for  the  period.  From 
the  capital  brought  out  by  the  statement  of  affairs  deduct  the  capital 
shown  by  the  capital  account  or  the  capital  accounts  prepared.  The 
dillerence  is  the  net  profit  for  the  period.  If  the  capital  shown  by  the 
capital  accounts  is  greater  than  the  capital  shown  by  the  statement  of 
affairs,  the  result  of  the  period's  transactions  is  a  loss." 

Where  the  books  have  been  kept  by  double  entry  the  net  profit  or  loss 
is  determined  by  what  is  known  as  the  Profit  and  Loss  Account  method. 

The  gross  profit  or  loss  is  determined  first,  by  the  trading  account. 
This  account  is  debited  for  costs  and  credited  for  returns  and  inventory 
the  difference  shows  gross  profit  or  gross  loss.  The  balance  so  ascer- 
tained is  then  transferred  to  the  profit  and  loss  account.  This  profit  and 
loss  account  is,  in  addition  to  this  balance  also  charged  with  all  debit 
balances  of  the  nominal  accounts,  and  is  credited  with  all  credit  balances 
of  the  nominal  accounts.  Depreciations  and  reserves  are  also  charged 
against  this  account  the  final  balance,  if  any,  will  show  a  loss  or  a  gain; 
a  loss  if  a  debit  balance,  a  gain  if  a  credit  balance. 

(35)  By  the  term  "Capital  Expenditure"  is  meant,  expenses  incurred 
for  ihe  sake  of  acquiring,  or  completing  the  plant  and  equipment  of  an 
enterprise,  with  a  view  of  placing  it  on  a  revenue-earning  basis.  Whereas 
by  th'*  term  **  Revenue  Expenditure  "  is  meant  all  those  expenses  incurred 
in  connection  with  the  earning  of  revenue. 

In  differentiating  between  capital  and  revenue  expenditure  we  must 
bear  in  mind  what  the  outlay  is  for.  If  it  is  such  that  will  improve  the 
equipment,  and  thus  increase  its  capacity  to  earn  revenue,  it  should  be 
charged  as  capital  expenditure,  otherwise  as  revenue. 

(36)  With  regard  to  the  books  the  following  additional  ones  would  be 
used  by  a  corporation: 

(a)  Minute  book. 

(b)  Subscription  book. 

(c)  Installment  book.  \ 

(d )  Installment  scrip  book  \ 
(r)   Stock  certificate  book. 
(/)  Stock  ledger. 

(g)  Dividend  book. 

With  regard  to  accounts  the  following  additional  ones  are  some  of  the 
accounts  that  would  appear  on  the  ledger  of  an  incorporated  company, 
which  would  not  be  found  in  a  ledger  of  a  partnership  firm:  Capital 
stock,  subscription,  surplus,  bond  account,  treasury  stock,  etc. 


(In  installment  cases) 


197 


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Accounting  Problems  and  Solutions. 

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Answers  in  Theory  of  Accounts. 

(38)  By  the  term  "  Depreciation  "  is  meant  that : 

"  It  is  necessary,  in  addition  to  charging  actual  expenditure  upon  re- 
pairs and  replacements  to  revenue,  to  charge  against  the  revenue  account 
of  each  year  a  further  sum,  with  a  view  to  (as  far  as  possible)  averaging 
the  expenditure  on  revenue  account  over  a  term  of  years  and  that  pro- 
vision which  it  is  so  necessary  to  charge  is  usually  called  by  the  name 
*  Depreciation  *."    (Dicksee) 

There  are  several  methods  of  apportioning  these  charges,  viz  : 

(a;  An  equal  proportion  of  the  cost  may  be  written  off  each  year; 

that  is  where  we  know  the  life  of  the  asset  and  provided  there  is 

no  residual  value  at  the  expiration  of  its  life. 

(b)  By  the  second  method  the  asset  may  be  written  down,  from  year 
10  year,  by  deducting  depreciation  at  a  fixed  rate  per  cent,  upon  the 
balance  standing  to  the  debit  of  the  account  at  the  commencement 
of  the  year. 

(c)  By  writing  off  to  revenue  each  year  an  equal  sum  sufficient  at  the 
expiration  of  the  life  of  the  asset  to  reduce  the  asset  to  zero. 
This  is  called  the  annuity  system.  ^  ' 


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Accounting  Problems  and  Solutions. 

^    Auditing. 

Questions. 

(i)  How  would  you  determine  the  profits  for  a  given  period  from 
a  set  of  books  kept  on  the  single  entry  system,  the  capital  at  the  be- 
ginning of  the  period  being  known? 

(2)  In  the  construction  of  a  large  building  the  proprietors  issue 
$800,000  20-year  6  per  cent,  bonds  which  are  disposed  of  to  the  con- 
tractors at  85  per  cent,  of  their  face  value.  You  find,  upon  examination, 
that  the  discount  of  15  per  cent,  has  been  charged  to  Construction  Account 
in  the  first  place,  and  then  into  Building  Account. 

State  whether  you  consider  the  final  entry  legitimate  or  not,  and  give 
reasons. 

(3)  You  are  elected  the  auditor  of  a  corporation  by  the  holders  of 
both  common  and  preferred  stock  and  it  is  your  duty  to  safeguard  the 
interest  of  both  classes  of  stockholders.  The  preference  stock  bears  7 
per  cent,  and  is  non-cumulative.  Mention  what  precautions  you  would 
adopt  to  safeguard  the  interests  of  the  preference  shareholders,  giving 
reasons  therefor. 

(4)  Explain  the  various  measures  which  you  would  adopt  to  verify 
whether  or  not  all  cash  received  has  been  duly  accounted  for  on  the  books 
of  the  concern  you  were  auditing. 

(5)  A  corporation  has  sold  its  first  mortgage  bonds  at  a  premium  and 
its  second  mortgage  bonds  at  a  discount.  How  should  the  premium  and 
discount  be  dealt  with  on  the  books? 

(6)  After  auditing  the  books  of  a  manufacturing  company  for  a  period 
of  ten  years  you  are  asked  to  give  a  certificate  as  to  the  net  earnings  of 
the  business  for  those  ten  years,  for  the  purpose  of  a  sale  based  on  the 
earning  capacity  of  the  property.  What  items  of  expense  heretofore 
charged  annually  through  the  Profit  and  Loss  Account  may  be  properly 
eliminated  in  the  preparation  of  your  certificate,  and  why? 

(7)  Describe  in  detail  the  method  that  should  be  used  to  verify  the 
securities  representing  the  investments  of  a  company  under  audit,  in  the 
case  of 

(a)  Real  estate. 

(b)  Mortgages  on  real  estate. 

(c)  Certificates  of  stock. 

(d)  Railway  bonds. 

(8)  Under  what  circumstances,  if  any,  would  it  be  proper  to  open  an 
account  with  Good  Will?  On  finding  a  Good  Will  Account  on  the  ledger 
of  a  business  for  which  you  are  to  prepare  an  account  statement,  how 
would  you  treat  the  account,  or  what  special  adjustment  would  you  sug- 
gest in  regard  to  it? 

(9)  As  an  auditor  what  authority  would  you  require  for  the  passing 
of  vouchers  in  payment  of  directors'  fees  ? 

200 


Qttestions  in  Auditing, 

(10)  Acting  as  an  auditor  of  a  manufacturing  company,  state  briefly 
the  essential  points  to  be  considered  in  ascertaining  the  correct  profits 
so  far  as  the  inventories  are  concerned. 

(11)  If  a  company,  duly  organized,  acquires  several  plants  that  are 
found  to  be  in  a  "  run  down "  condition  and  to  require  extensive  outlay 
for  repairs  and  renewals  to  bring  them  to  the  required  state  of  efficiency, 
should  such  outlay  be  charged  against  Capital  or  against  Revenue?  Give 
reasons. 

(12)  If  asked  to  give  advice  concerning  the  proper  rates  per  cent,  to 
be  adopted  in  providing  for  the  accounts  for  depreciation  on  buildings, 
machinery,  tools,  etc.,  what  would  you  recommend? 

(13)  What  method  would  you  recommend  in  the  conduct  of  a  cash 
account  to  facilitate  a  speedy  and  thorough  audit  thereof? 

(14)  In  auditing  the  books  of  a  building  and  loan  association  what 
would  be  your  procedure  to  enable  you  to  verify  the  correctness  of  the 
same? 

(is)  What  are  the  most  important  things  to  which  an  auditor  is 
expected  to  certify  in 

(a)  The  Balance  Sheet. 

(b)  The  Profit  and  Loss  Account? 

(16)  To  what  extent  may  the  "organization  expenses"  of  a  corpora- 
tion be  regarded  as  a  permanent  asset  and  how  should  this  account 
accordingly  be  dealt  with? 

(17)  State  the  general  principles  governing  the  discrimination  between 
what  constitutes  proper  charges  against  capital  and  what  constitutes 
proper  charges  against  revenue. 

(18)  Is  there  any  reason  why  the  goodwill  carried  as  an  asset  on  the 
books  of  a  prosperous  and  growing  manufacturing  concern  should  be 
depreciated,  amortized  or  otherwise  written  off,  and  if  so  what  would  be 
the  effect  of  such  depreciation  amortization  or  writing  off? 

(19)  In  making  up  the  annual  balance  sheet  of  a  manufacturing  business, 
what  values  should  be  stated  in  the  inventory  of  completed  product  on 
hand,  product  in  process,  and  unconsumed  materials,  assuming  that 
average  conditions  prevail  with  respect  to  market  prices  of  material  and 
labor? 

(20)  What  do  you  understand  by  the  term  "Secret  or  Hidden  Re- 
serves"? Mention  four  (4)  bona-fide  uses  of  a  secret  reserve  and  state 
your  opinion  as  to  the  propriety  or  otherwise  of  the  creation  of  such 
"  reserves,"  giving  reasons. 

(21)  In  a  case  where  the  preferred  shares  of  a  company  are  issued 
under  a  provision  that  the  annual  dividends  to  which  they  shall  be 
entitled  shall  be  "cumulative,"  would  you  consider  it  necessary  to  show 
any  arrears  of  dividend  as  a  liability  upon  the  balance  sheet,  or  how  would 
you  deal  with  it? 

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(22)  In  the  preparation  of  a  manufacturing  and  trading  account  and  • 
balance  sheet,  state  on  what  basis  the  following  assets  should  be  valued: 

(a)  Raw  materials. 

(fr)  Product  in  process  of  manufacture. 

(c)  Manufactured  product. 

(d)  Bills  receivable. 

(e)  Accounts  receivable. 
Give  fully  your  reasons. 

(23)  Give  a  brief  description  of  the  books  of  a  corporation  that  should 
be  examined  and  inspected  by  the  auditor,  and  state  the  reasons  why  such 
examination  or  inspection  should  be  made. 

(24)  In  making  an  examination  for  an  intending  purchaser  of  a  busi- 
ness, what  are  the  principal  matters  that  should  be  looked  into? 

(25)  State  the  different  kinds  of  audits  and  describe  them. 

(26)  How  would  you  verify  bills  discounted  for  customers  in  auditing 
the  accounts  of  a  bank? 

(a)  Those  in  hand  at  the  date  of  the  balance  sheet. 
Co)  Those  re-discounted. 

(27)  What  steps  would  you  take  to  satisfy  yourself  that  the  book 
debts  of  a  trading  company  were  fairly  stated  in  the  balance  sheet 
submitted  to  you  for  audit? 

(28)  What  do  you  consider  the  proper  way  to  handle  cash  in  accounts? 
What  advantages  are  there,  if  any,  in  banking  each  day  the  exact 

receipts  of  the  previous  day? 

How  would  you  verify  the  correctness  of  a  cash  book,  and  insure  the 
entry  of  all  cash  received  ? 

(29)  Give  at  least  two  (2)  examples  of  contingent  liabilities,  and  state 
how  they  should  be  treated  in  the  books,  and  on  the  balance  sheet. 

(30)  What  duties  and  responsibilities  has  an  auditor  in  connection  with 
inventories  of  goods  on  hand? 

(31)  How  should  a  leasehold  be  treated  in  the  accounts  of  a  company 
and  how  should  it  be  shown  on  the  balance  sheet? 


Auditing. 

Answers. 

(i)  In  Single  Entry  Bookkeeping  the  transactions  of  a  business  are  re- 
corded only  in  so  far  as  they  effect  changes  in  assets  and  liabilities,  so 
that  profits  or  losses  must  be  determined  by  a  comparison  of  the  financial 
condition  at  the  beginning  and  ending  of  a  period.  The  capital  being 
known  at  the  beginning  of  a  period  it  is  important  to  find  out  whether  any 
increases   or   decreases   of  such   capital   took  place.       It  also  would  be 

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necessary  to  appraise  values  and  take  stock  at  the  end.  The  difference 
would  be  profit  in  case  of  an  increased  showing  and  loss  in  case  of  a 
decreased.  There  is  no  proof  upon  the  work,  as  the  scheme  of  revenue 
accounts  peculiar  to  the  double  entry  system,  which  in  itself  shows  the 
results  from  a  period  of  operations,  is  lacking. 

(2)  If  the  proceeds  of  these  bonds  were  to  be  applied  for  construction, 
and  in  all  probability  they  were,  the  cost  of  disposing  these  bonds,  e.  g., 
the  discount  should  be  charged  to  construction  account.  The  reason  is 
that  the  construction  work  has  cost  not  only  the  amount  actually  ex- 
pended thereon,  but  also  the  discount  lost.  If,  on  the  other  hand,  only 
part  of  the  proceeds  were  used  for  construction  purposes,  then  to  that 
extent  the  discount  is  to  be  charged  to  construction.  The  discount  on 
the  balance  is  to  be  spread  over  the  life  of  the  bonds. 

(3)  Due  care  must  be  observed  in  examining  various  charges  for 
depreciation  and  renewals ;  that  is,  there  should  not  be  created  a  greater 
reserve  for  the  wear  and  tear  of  the  assets  than  the  actual  conditions 
demand.  Preferred  stockholders  do  not  benefit  much  by  heavy  charges 
for  depreciation,  as  long  as  the  dividends  on  their  stock  are  non- 
cumulative.  Each  increase  in  the  provision  for  depreciation  means  a 
greater  advantage  to  common  stockholders  and  a  corresponding  dis- 
advantage to  preferred  stockholders.  The  auditor  must  also  watch  for 
proper  classification  of  accounts,  e.  g.,  that  capital  expenditures  are  not 
charged  to  revenue  accounts. 

(4)  To  verify  whether  or  not  all  cash  received  had  been  duly 
accounted  for  on  the  books  of  the  concern  the  auditor  should  proceed  as 
follows : 

"The  debit  side  of  the  Cash  Book  should  be  checked  with  the  most 
independent  source  the  Auditor  can  find  available— for  example,  the 
counterfoils  of  Receipt  Books,  a  Counter  Cash  Book,  the  Customer's  Pass 
Books  of  a  Bank." 

"The  items  on  the  credit  side  of  the  Cash  Book  should  be  checked 
with  the  vouchers  for  the  payment."     (Pixley.) 

(5)  When  bonds  are  sold  at  a  discount  it  is  best  to  charge  that  dis- 
count to  the  account  for  which  the  funds  were  to  be  raised,  as  this  is  an 
additional  item  of  cost.  When  they  are  sold  at  a  premium  the  surplus 
should  be  credited  to  a  Reserve  Account.  This  would  also  be  the  case 
with  discounts,  when  the  bonds  sold  are  not  for  any  definite,  but  for  a 
general  purpose.  In  either  case  it  would  be  an  ultimate  source  of  income 
or  expenditure.  It  is,  however,  advisable  to  spread  the  discount  over  the 
life  of  the  bonds. 

(6)  For  the  purpose  of  sale  the  following  charges  might  be  properly 
eliminated.  Interest  charges  on  loans  or  notes,  as  these  are  charg.-s  that 
do  not  relate  to  trading  directly,  but  disclose  insufficiency  of  capital.  With 
adequate  funds  available  for  conducting  the  business  these  expenditures 
would  not  have  beeti  incurred. 

Interest  on  capital  should  also  be  eliminated,  as,  in  the  case  of  a  cor- 

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poration,  this  item  would  be  available  for  dividends.  Excessive  reserve 
charges,  or  management  salaries,  extraordinary  and  unusual  losses,  as 
well  as  losses  on  account  of  accidents,  should  also  be  adjusted. 

(7)  a.  Real  estate  would  be  verified  by  the  production  of  deeds  as 
well  as  vouchers  of  payment  for  same,  showing  original  cost  and  by  search 
of  title  records.  Any  other  charges  unless  they  represent  additional 
capital  expenditure  in  improvements  or  acquisition  of  property  should 
be  eliminated. 

h.  Mortgages  on  Real  Estate  should  be  verified  by  presentation  of  the 
checks  paid  for  them  and  the  deeds,  examining  also  their  recording  as 
well  as  the  matter  of  interest. 

c.  and  d.  Certificates  of  Stock  as  well  as  Bonds  should  be  verified  by 
the  production  of  the  securities  and  determining  their  market  value.  It  is 
also  advisable  to  look  into  the  genuineness  of  the  securities. 

(8)  Whenver  a  vendee  firm  has  paid  a  sum  of  money  for  the 
acquisition  of  a  business,  in  excess  of  the  real  value  of  the  assets,  or 
where  heavy  expenditures  have  been  made  in  establishing  a  trade,  it  is 
proper  to  charge  it  to  a  good  will  account.  In  preparing  an  annual  state- 
ment the  item  should  be  separated  from  the  other  assets  appearing  on  the 
balance  sheet.  The  special  adjustment  that  an  auditor  might  suggest 
would  be  to  write  it  off  by  distributing  the  sum  for  a  period  of  years  and 
charging  a  due  proportion  of  it  yearly  to  Profit  and  Loss  account. 

(9)  The  best  authority  in  such  a  case  would  be  the  minute  book  of 
stockholders'  general  meetings  and  the  by-laws  of  the  corporation. 

(10)  The  auditor  should  satisfy  himself  of  the  existence  of  the  inven- 
tories by  getting  a  certificate  from  some  one  in  authority  as  to  quantity 
and  figures.  It  is  important  to  see  that  the  inventory  should  be  taken  at 
cost  and  not  at  market  price.  If  the  inventory  is  to  be  used  for  the  pur- 
pose of  preparing  a  profit  and  loss  account,  in  such  a  case  it  should  be  at 
cost. 

(11)  Such  outlays  should  be  charged  against  capital.  It  is  presumed 
that  the  plants  are  acquired  in  the  condition  as  described  and  the  pur- 
chasing price  paid  for  same  must  have  been  only  to  the  extent  that  these 
assets  are  worth.  Otherwise,  if  any  excess  of  the  value  was  paid,  it  was 
not  paid  for  the  asset  proper,  but  most  likely  for  the  good  will  attached ; 
hence,  any  additional  extensive  outlay  for  repairs  and  renewals  was  for 
the  purpose  of  bringing  it  to  a  point  of  efficiency  to  earn  greater  revenue, 
and  therefore  it  is  a  legitimate  capital  expenditure. 

"Expenditure  which  is  incurred  with  a  view  to  completing  or  im- 
proving the  equipment  of  the  undertaking,  and  thus  increasing  its  capacity 
to  earn  revenue,  may  be  properly  charged  as  capital  expenditure." 
(Dicksee.) 

(12)  The  following  rates  would  be  approximately  proper  allowances 
for  depreciation: 

Buildings  from  2  per  cent,  to  5  per  cent.,  to  be  deducted  annually. 

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Machinery  from  7  per  cent,  to  10  per  cent.,  annually  from  resulting 

balance. 
Tools  revalued. 

Boilers  from  10  per  cent,  to  15  per  cent,  per  annum. 
Engines  from  5  per  cent,  to  7  per  cent,  per  annum. 
Horses  from  15  per  cent,  to  25  per  cent,  on  starting  balance. 
Furniture  and  fittings  revalued. 

(13)  To  facilitate  a  speedy  and  thorough  audit  of  the  cash  account,  it 
is  best  to  have  all  cash  receipts,  of  whatever  nature,  deposited  in  the 
bank,  and  make  payments  by  check  only.  Petty  expenditures  may  be 
taken  care  of  by  making  the  petty  cash  clerk  directly  responsible  to  the 
general  cashier,  to  whom  he  is  to  render  a  periodical  statement  of  his 
disbursements  in  voucher  form,  receiving  in  exchange  a  check  for  the 
total  of  same.  It  is  also  well  to  use  a  counterfoil  receipt  book  for  pro- 
ceeds of  cash  sales  and  other  income. 

(14)  To  make  the  audit  complete  in  every  detail  one  should: 

1st.  Verify  all  extensions  and  footings  in  the  books  of  original 
entry. 

2d.  Check  each  item  in  the  Members'  Pass  Books  with  the  Con- 
tribution Book  and  Stockholders'  Ledger. 

3d.  Check  each  entry  in  the  Contribution  Book  with  the  Stock- 
holders' Ledger. 

4th.  Check  each  entry  in  the  Withdrawal  Book  with  the  Stock- 
holders' Ledger. 

5th.  Check  each  entry  in  the  Contribution  Book  and  Withdrawal 
Book  with  the  Cash  Book. 

6th.  Check  the  Treasurer's  Receipt  Book  with  the  Contribution 
Book. 

7th.  Check  the  Treasurer's  Cash  Book  with  the  Withdrawal  Book. 
8th.  Check  the  totals  of  the  Cash  Book  with  the  totals  in  the  Gen- 
eral Ledger.     (Keister.) 

(15)  a.  In  the  balance  sheet  the  auditor  is  expected  to  certify  that 
the  assets  and  liabilities  are  neither  over-  nor  under-stated ;  and  that  it  is 
a  correct  and  complete  statement  of  the  financial  position  of  a  concern  at 
a  particular  time. 

b.  In  the  Profit  and  Loss  Account  the  auditor  is  expected  to  certify 
that  the  earnings  are  correctly  stated,  and  that  all  items  of  income  or 
expenditure  have  been  included. 

(16)  "Organization  expenses"  should  not  be  regarded  as  a  permanent 
asset  because  it  is  not  a  capital  expenditure  for  the  acquisition  of  assets, 
but  is  more  closely  connected  with  revenue.  It  is  desirable  to  write  oflF 
the  amount  within  the  first  few  years. 

(17)  If  the  expenditure  incurred,  has  been  of  such  a  nature  as  to  im- 
prove the  earning  capacity,  in  such  case  the  charge  should  be  against 
capital. 

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If  on  the  other  hand  it  was  of  such  nature  as  to  merely  renew  the 
wasting  asset,  to  bring  it  back  to  that  condition  that  it  was  at  the 
beginning  of  a  given  period,  it  should  be  charged  against  revenue. 

(i8)  There  is  no  definite  rule  by  which  one  can  be  guided  whether  to 
amortize  and  depreciate  goodwill  or  not.  Opinions  differ  as  to  the  method 
to  pursue.  We  have,  however,  an  English  decision  in  the  case  of  Wilmer 
V.  McNamara,  1895,  where  the  Court  has  decided  that  even  where  the 
goodwill  has  actually  declined  in  value  it  is  not  necessary  to  charge  the 
shrinkage  against  profits. 

The  basis  of  this  decision  was  that  goodwill  is  "fixed"  capital,  and 
there  is  no  doubt  that  goodwill  is  the  most  permanent  of  all  assets.  The 
soundest  and  most  conservative  policy  would  be  to  write  it  off  annually. 
It  is  quite  true  that  by  so  doing  a  secret  reserve  is  created,  the  propriety 
or  impropriety  of  which  is  entirely  a  different  subject,  and  is  considered  in 
connection  with  another  question. 

(19)  If  the  firm  had  a  cost  system  that  would  show  the  cost  of  the 
goods  in  process,  to  which  we  would  add  a  portion  of  the  overhead 
charges,  although  this  is  usually  held  back  till  the  goods  are  completed. 
Product  on  hand  should  be  valued  at  cost,  while  unconsumed  material, 
if  the  market  price  is  lower  than  the  cost  price,  it  should  be  valued  at  the 
former,  otherwise  at  the  latter.  Provision  may,  however  be  made  for 
increase  or  decrease  by  creating  a  reserve  for  this  purpose. 

(20)  By  the  term  "  Secret  or  Hidden  Reserves "  is  meant  a  reserve 
created  by  making  excessive  charges  against  revenue  which  are  not  justi- 
fied, and  which  reserve  does  not  appear  on  the  books  of  the  concern.  Such 
reserve  cither  undervalues  the  assets  or  inflates  the  liabilities.  The  bona- 
Ude  uses  of  "  Hidden  Reserves  "  can  be  divided  as  follows : 

(0)  To  equalize  apparent  profits  and  dividends. 
(&)  To  extend  the  scope  of  the  business. 

(c)  To  consolidate  the  undertaking. 

(d)  To  provide  against  unforseen  losses. 

One  of  the  chief  arguments  against  the  creation  of  "  Secret  Reserves  *' 
is  that  they  rob  the  present  generation  of  stockholders  at  the  expense  of 
posterity.  A  more  powerful  argument  is  that  they  open  a  loophole  for 
fraud. 

It  is  very  difficult  to  give  an  exact  opinion  as  to  the  propriety  or  other- 
wise of  "  Hidden  Reserves  ".  Considering  the  many  abuses  to  which  such 
a  reserve  is  liable,  and  to  which  it  is  usually  subject,  one  would  think  it 
improper,  because  unless  the  utmost  confidence  can  be  placed  in  the 
managers,  there  is  great  risk. 

Dicksee  well  states:  This  most  debatable  subject  is  approached  with 
considerable  diffidence.  Very  much  can  be  (and  has  been)  said  on  both 
sides  of  the  question,  making  it  a  most  difficult  thing  to  say  what  is  really 

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the  correct  course  to  adopt  in  any  particular  case;  and,  if  the  question 
be  complicated,  even  where  a  particular  case  is  judged  upon  its  own 
merits,  how  much  more  difficult  is  it  to  lay  down  any  general  rules  of  uni- 
versal application." 

(21)  Arrears  in  dividends  in  the  case  of  cumulative  preferred  stock 
need  not  be  shown  among  the  liabilities  of  a  balance  sheet.  Such  arrears 
are  only  claims  against  profits  earned,  but  not  against  the  assets  of  a 
corporation.  It  is,  however,  advisable  to  append  a  foot  note,  stating  this 
fact  so  that  prospective  purchasers  of  common  stock  should  not  be  misled. 

{22)   (a)  Cost  price,  provided  market  value  is  not  lower  than  the  cost 
price;  otherwise  market  price. 

(b)  At  cost  of  production. 

(c)  At  cost  of  production.  In  both  b  and  c  should  "overhead"  items 
be  added. 

The  reason  is  that  as  these  values  are  for  the  purpose  of  showing  cor- 
rectly the  profit  or  loss  for  the  period,  cost  value,  or  market  value,  if  the 
latter  is  lower  should  be  figured. 

{d  and  e)  They  should  be  divided  into  good,  doubtful  and  bad,  so  that 
each  asset  is  carried  only  at  that  figure  which  it  will  reasonably 
realize. 

(23)  In  addition  to  examining  and  verifying  the  ordinary  books  the 
auditor  is  to  examine  and  inspect  the  following  record  books : 

(a)  The  minute  book.  In  this  book  he  will  find  the  by-laws  by  which 
the  corporation  is  governed  and  also  all  resolutions  adopted  and 
whether  they  have  been  properly  carried  out. 

(b)  The  subscription  book,  which  will  disclose  how  much  stock  was 
subscribed  for  and  by  whom. 

{c  and  d)  The  stock  ledger  and  transfer  book.  They  will  show  the 
holding  of  each  stockholder,  or  any  of  his  transfers,  and  subse- 
quent holders.  By  this  means  he  will  be  in  a  position  to  verify 
whether  the  stock  issued  has  been  paid  for,  and  whether  in  cash  or 
property,  and  furthermore  whether  it  was  in  accordance  with  the 
wishes  of  the  directors  and  stockholders. 

(24)  To  see  whether  the  assets  or  profits  have  not  been  fraudulently 
overstated,  making  the  accounts  unduly  favorable. 

To  see  whether  the  liabilities  or  losses  have  not  been  undervalued, 
which  would  also  result  that  the  accounts  would  appear  unduly  favorable. 

In  general  to  see  whether  the  business  of  the  vendor  is  worth  pur- 
chasing, and  if  it  is  worth  the  price  he  asks  for  it. 

(25)  The  principal  kinds  of  audits  are  as  follows: 

.(^)  The  Periodical  Audit.  This  kind  of  audit  covers  a  statistical  period 
and  that  is  why  it  is  called  "  Periodical ".  Continuous  Audits  are 
the  same  as  periodical  ones,  but  they  are  taken  up  at  shorter 
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(t)  Completed  Audits.      By  this  is  meant  an  audit  begun  after  the 

trial  balance  has  been  completed. 
There  are,  of  course,  investigations  such  as : 

For  the  benefit  of  a  prospective  purchaser,  endeavoring  to  find  the 
exact  value  of  the  concern. 

For  the  benefit  of  a  retiring  or  incoming  partner. 

{26)  (a)  By  actual  inspection. 

(&)  By  tracing  the  transaction  through,  and  becoming  satisfied  that  the 
bank  has  received  credit  in  respect  of  the  bills  re-discounted.  It  is 
also  necessary  to  sec  that  provision  is  made  for  contingent  liabili- 
ties in  respect  of  bills  discounted  and  which  are  outstanding. 

(27)  Compare  the  list  of  book  accounts  with  the  corresponding  ledger 
balances,  noting  any  irregularities  of  payment  that  may  suggest  disputes. 
Consult  the  managers  of  the  concern  with  regard  to  accounts  in  doubt. 
In  some  cases  it  is  advisable  to  select  a  few  accounts,  or  take  them  at 
random  and  make  up  a  statement,  which  is  to  be  forwarded  to  the  cus- 
lomci  askmg  him  to  O.  K.  the  same  and  return  to  the  auditor. 

(28)  The  proper  way  to  handle  cash  accounts  is  to  have  all  cash  re- 
ceipts, of  whatever  nature,  deposited  in  the  bank  and  make  all  payments 
by  check  only.  Petty  cash  expenditures  to  be  handled  by  the  "  Imprest " 
system.    The  advantages  derived  from  banking  each  day  arc: 

(a)  That  it  facilitates  a  speedy  audit,  and 

(6)  Enables  to  trace  receipts  with  the  deposits. 

To  verify  the  correctness  of  a  cash  book,  and  insure  the  entry  of  all 
cash  received,  one  should  check  the  entries  of  the  cash  book  with  the 
most  independent  source  that  the  auditor  can  find  available — say,. counter- 
foils of  receipt  books,  bank  pass  books,  etc. 

(29)  Two  examples  of  contingent  liabilities  are: 

\,a)  Notes  receivable  discounted. 

(b)  Accommodation  instruments. 

Properly  they  should  appear  in  the  books  of  accounts  and  also  on  the 
balance  sheet.  In  some  cases  they  are  omitted  from  the  books  of  ac- 
count, but  included  in  the  balance  sheet  by  a  foot  note- 

(30)  He  has  to  get  a  certificate  from  some  one  in  authority  as  to  the 
correctness  of  the  inventory  and  on  what  basis  it  was  valued.  To  see 
that  the  same  is  cost  value,  or  where  the  market  value  is  lower,  it  is  the 
market  value. 

(31)  A  leasehold  may  be  regarded  as  the  purchase  money  paid  for  an 
annuity  terminable  at  some  definite  time.  It  is  then  advisable,  especially 
in  short-term  leases,  to  charge  a  proportionate  part  of  the  term  against 
revenue  each  year.  Leases  for  a  long  term  of  years  should  be  treated 
under  sinking  fund  plan.  In  the  balance  sheet  the  original  cost,  less  the 
depreciation  should  be  shown. 

208 


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Commercial  Law. 

Questions. 

(i)  What  is  a  corporation?  Describe  the  procedure  necessary  for  the 
formation  of  a  business  corporation  and  show  what  is  required  as  to  (a) 
number  of  incorporators,  (b)  number  of  directors,  (c)  capital  to  be 
paid  in. 

(2)  What  is  a  contract?  If  a  man  give  his  note  for  $1,000  to  a  friend 
simply  as  a  gift,  can  the  payee  of  that  note  collect  it  at  maturity?  Give 
reasons  for  your  answers. 

(3)  In  the  law  relating  to  corporations  the  term  "ultra  vires"  is  fre- 
quently employed.  Tell  in  a  general  way  what  you  understand  by  this  and 
how  acts  that  are  ultra  vires  are  regarded  in  the  law. 

(4)  What  are  "  days  of  grace  "  as  understood  in  the  law  relating  to 
commercial  paper? 

(5)  By  whom  are  the  directors  of  a  corporation  usually  selected  and 
by  whom  are  its  officers  generally  chosen? 

(6)  If  a  note  is  signed  by  N.  R.,  president,  and  A.  N.,  secretary,  with- 
out disclosing  the  corporation  for  which  they  act,  are  they  personally 
liable  on  the  note? 

(7)  If  a  bank  pays  a  check  drawn  on  it  by  a  depositor,  after  payment 
has  been  stopped,  can  the  depositor  recover  the  amount  so  paid? 

(8)  What  is    (a)    an  express  contract,    (b)    an   implied  contract? 

(9)  What  is  (a)  a  promissory  note,  (b)  a  bill  of  exchange,  (c)  an 
acceptance  ? 

(10)  Distinguish  clearly  between  public  corporations  and  private  cor- 
porations. 

(11)  What  is  the  statute  of  frauds?  What  contracts  must  be  in  writ- 
ing in  order  to  be  effective? 

(12)  What  is  a  contract  of  guaranty?  How  does  it  differ  from  a 
contract  of  suretyship? 

(13)  Name  and  describe  two  principal  classes  of  partners. 

(14)  a.  What  is  a  corporation? 

b.  How  is  a  corporation  dissolved? 

c.  What  is  a  stockholder's  right  as  regards  voting  and  investi- 
gation ? 

d.  What  is  a  stockholder's  liability? 

(15)  a.  What  courts  have  jurisdiction  over  bankruptcy  cases? 

b.  What   is    the    difference    between    voluntary   and   involuntary 
bankrupts  ? 

c.  May  a  corporation  become  a  voluntary  bankrupt? 

d.  May  a  partnership  become  a  voluntary  bankrupt? 

(16)  a.  Give  the  essential  requisites  of  negotiable  instruments. 
b.  What  words  make  a  note  negotiable? 

209 


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Accounting  Problems  and  Solutions. 

(17)  What  is  the  liability  of  the  parties  to  a  certified  check?  Give 
reasons  for  your  answer. 

(0)  What  is  the  effect  of  an  alteration  of  a  negotiable  instrument? 

(18)  What  is  the  object  of  passing  bankruptcy  laws? 

(a)  At  the  first  meeting  of  creditors  in  the  bankruptcy  of  Smith,  all 
of  the  creditors,  who  had  proved  their  claims,  voted  for  Jones,  as 
trustee.  To  this  the  bankrupt  Smith  objected,  on  the  ground  that 
Jones  was  not  competent,  and  furthermore  being  his  personal 
enemy,  would  act  mahciously  towards  him.  The  referee,  there- 
upon, disapproved  of  Jones  and  appointed  another  Trustee.  Can  a 
motion  be  made  to  set  aside  this  appointment?  On  what  grounds? 
Explain  fully. 

(19)  State  the  essential  feature  of  a  partnership.  Must  each  partner 
have  an  interest  in  both  profits  and  losses? 

(20) 

(a)  Define  a  negotiable  promissory  note. 

(6)  W'hat  is  the  liability  of  a  general  endorser  on  a  promissory  note? 

(21)  Define  a  corporation  and  name  the  different  kinds. 

(22)  Define  a  contract  and  state  what  contracts  must  be  in  writing. 

(23)  A  owes  B  $500.00  and  offers  his  note  for  the  amount  for  four 
months.  B  demands  security  and  C,  at  his  request,  signs  the  following 
paper : 

"  I  agree  to  become  responsible  as  surety  for  the  payment  of  A's  note 
for  Five  Hundred  Dollars  ($500.00)  dated  this  day. 

When  the  note  becomes  due,  A  pays  $100.00  on  account  and  gives  B 
a  new  note  for  $400.00  at  four  months.  This  last  note  is  not  paid,  and 
B  sues  C  on  the  above  contract  Can  C  make  any  defense,  and  if  so, 
what? 

(24)  Is  the  following  instrument  a  negotiable  promissory  note? 

Chicago,  April  8,  1908. 
Thirty  days  after  William  H.  Taft  is  elected  President  of  the  United 
States,  I  promise  to  pay  to  the  order  of  William  J.  Bryan  Five  Hundred 
Dollars,  at  the  First  National  Bank  of  Chicago,  for  value  received. 

(Signed)    Joseph  G.  Cannon. 
Give  reasons  for  your  answer. 

(25)  Must  the  stock  of  an  Illinois  corporation  be  paid  in  wholly  or  in 
part  before  certificate  of  complete  organization  is  issued,  and,  if  so,  in 
what  may  such  payment  be  made? 

(26)  What  is  the  statute  of  limitations  and  on  what  policy  is  it 
founded  ?  Explain  fully  and  mention  three  ways  that  will  prevent  the 
statute  from  running  against  an  ordinary  debt. 

(27)  State  the  procedure  necessary  in  New  York  State  for  dissolving 
a  corporation. 

210 


Questions  in  Commercial  Law. 

(28)^  Goods  are  delivered  to  a  buyer  "  on  approval "  or  "  on  sale  or 
return ".    When  does  the  property  in  such  goods  pass  to  the  buyer? 

(29)  Give  a  brief  account  and  show  the  connection  between : 
Law  merchant,  common  law,  statute  law. 

(30)  What  is  usury? 

Give  the  legal  rates  of  interest  in  Florida,  and  state  the  result  of  an 
agreement  to  pay  more  than  the  legal  rate. 

(31)  Define  partnership.    How  many  kinds  of  partnership  are  there 
and  wherem  do  they  differ  from  one  another  ?  * 


Commercial  Law. 

Answers. 

(i)  A  corporation  is  an  artificial  person  created  by  law.  It  exists  only 
^''ir^I'f,.^.^  *^^  permission  of  the  State,  and  has  only  such  power,  rights 
and  liabilities  as  the  State  accords  to  it.  The  corporation  is  a  legal  entity 
entirely  distinct  from  the  natural  persons  who  may  be  its  members  A 
corporation  is  formed  generally  as  follows :  A  certificate  of  incorporation 
must  be  executed  and  acknowedged  in  duplicate  by  the  incorporators  •  one 
duplicate  must  be  filed  in  the  office  of  the  Secretary  of  State  and  the  other 
m  the  office  of  the  clerk  of  the  county  where  the  main  business  office  of  the 
corporation  is  to  be  located,  the  proper  fees  and  taxes  must  be  paid  to 
the  Secretary  of  State,  the  State  Comptroller  and  the  County  Clerk;  a 
meeting  of  the  incorporators  must  be  held  accepting  the  charter  thus 
granted,  and  the  directors  must  meet  and  elect  officers.  The  number  of 
mcorporators  must  not  be  less  than  three,  which  is  also  true  of  the  direc- 
tors. At  least  $500.00  must  be  paid  in  at  the  time  of  filing  the  certificate, 
this  being  the  only  restriction  on  the  total  amount  of  authorized  capital. 

All  this  is  found  in  general  business  and  stock  corporation  laws. 
Any  answer  must  be  based  on  knowledge  of  the  several  sections  of  the 
above  laws  applicable. 

(2)  A  contract  is  an  agreement  beteween  two  or  more  persons,  com- 
petent to  act,  founded  on  a  sufficient  and  legal  consideration,  to  do  or  not 
to  do  some  particular  thing. 

No :  he  can  not  collect,  on  account  of  lack  of  consideration.  "  A  valid 
consideration  is  necessary  to  support  any  contract  and  the  rule  applies 
with  equal  force  in  the  law  of  negotiable  instruments,  when  the  question 
of  consideration  is  open  to  inquiry."    (Tompkins.) 

(3)  When  a  corporation  performs  acts  beyond  its  express  or  implied 
powers,  the  acts  are  said  to  be  "ultra  vires/*  In  law  ultra  vires  acts  are 
not  binding  upon  the  parties,  unless  the  corporation  can  be  estopped  to 
set  up  its  lack  of  power,  in  which  case  it  is  bound. 

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(4)  By  the  term  "days  of  grace"  was  meant  three  days  that  were 
added  to  the  time  stated  in  which  the  instrument  should  become  duo. 
This  was  done  for  the  purpose  to  give  the  maker  or  acceptor  an  oppor- 
tunity to  arrange  for  payment.  It  has,  however,  been  abolished  by  statute 
in  most  of  the  states. 

(5)  The  directors  of  a  corporation  are  usually  selected  by  the  stock- 
holders, while  the  officers  may  be  chosen  either  by  the  directors  or 
stockholders. 

(6)  They  are  personally  liable.  The  note  should  bear  the  corporation's 
name  first,  in  order  that  its  officers  may  free  themselves  from  personal 
liability.  In  this  case  their  signatures  indicate  them  as  principals;  the 
adding  of  the  words  (president  and  secretary)  does  not  release  them  in 
the  least. 

(7)  Yes,  he  can  recover. 

(8)  a.  An  express  contract  is  such  an  agreement  as  arises  from  the 
words  of  the  parties,  whether  written  or  oral,  showing  an  intention  to 
be  bound. 

b.  An  implied  contract  is  such  as  reason  and  justice  dictate  and 
which  the  law  presumes  that  every  man  undertakes  to  perform.  If  I 
employ  a  person  to  perform  for  me  any  labor,  the  law  implies  that  I 
contract  to  pay  him  the  reasonable  value  for  his  work. 

(9)  a.  A  promissory  note  is  an  unconditional  written  promise  made 
by  one  or  more  persons  to  pay  to  another  or  his  order  or  bearer  a 
sum  certain  in  money  on  demand  or  at  a  specified  time. 

b.  A   bill   of  exchange  is  a  written  order  from  one  person  to  another 
to  pay  to  a  third  party  or  his  order  a  certain  amount  of  money  at  sight 
or  at  a  specified  time. 

c.  An  acceptance  of  a  draft  or  bill  of  exchange  is  the  signification 
by  the  drawee  of  his  assent  to  the  order  of  the  drawer. 

(10)  Public  corporations  are  government  institutions,  created  for  the 
administration  of  the  public  affairs  of  the  community.  States,  counties 
and  municipalities  are  examples  of  public  corporations. 

Private  corporations  are  associations  formed  by  the  voluntary  agree- 
ment of  their  members,  for  the  purpose  of  making  profits.  Examples  of 
this  kind  of  corporations  are:  Railroads,  Banks,  Manufacturing  or 
Trading  concerns,  etc. 

(11)  The  Statute  of  Frauds  is  a  term  given  to  the  statutory  enact- 
ment which  provides  that  certain  contracts  must  be  in  writing  or  they 
cannot  be  enforced  at  law.  The  following  contracts  must  be  in  writing  in 
order  to  be  effective : 

1.  A  contract  which,  by  its  terms,  is  not  to  be  performed  within 
one  year  from  the  making  thereof. 

2.  A  contract  to  answer  for  the  debt  for  another  person. 

3.  A  contract  in  consideration  of  marriage. 

4.  A    contract   promising   to   pay   a   debt   already   discharged   in 
bankruptcy. 

212 


Anszvers  in  Commercial  Law. 

5.    A  contract  for  sale  of  lands  or  any  interest  in  them. 

(12)  Contracts  of  guarantee  and  suretyship  are  often  used  as  synony- 
mous terms,  and  while  similar  in  many  respects,  the  contract  of  a 
guarantor  differs  from  that  of  surety  in  the  following  particulars: 

The  surety  is  bound  jointly  with  the  principal,  and  often  by  a  contract 
entered  mto  at  the  same  time  and  upon  the  same  consideration,  and  may 
be  sued  jointly  with  the  principal. 

A  contract  of  a  guarantor  is  a  separate  tmdertaking  often  made  upon 
separate  consideration,  and  upon  which  he  must  be  sued  alone. 

(13)  Public  and  secret  partners.  A  public  partner  is  an  active  mem- 
ber of  a  firm  who  participates  in  the  business  and  is  known  to  the  world 
as  such.  A  secret  partner  is  one  who  in  reality  is  a  partner,  but  who 
conceals  the  fact  from  the  public  as  well  as  from  the  customers  of  the 
partnership. 

(14)  a.  A  corporation  is  defined  to  be  a  collection  of  individuals 
united  by  authority  of  law  into  one  body,  under  a  special  name,  with  the 
capacity  of  perpetual  succession  and  of  acting  in  many  respects  as  an 
mdividual.     (Gano.) 

b.  A  corporation  is  dissolved: 

1.  By  the  expiration  of  its  charter. 

2.  By  the  surrender  of  its  charter,  provided  the  State  consents  to  it 
3-     By  the  repeal  of  its  charter  by  the  legislature. 

4.    By  the  forfeiture  of  its  charter,  for  misuse  of  its  powers. 

c.  Each  stockholder  is  entitled  to  a  vote,  according  to  his  holding 
(one  vote  for  each  share),  in  person  or  by  proxy.  The  stockholders 
usually  have  the  right  of  examining  the  books,  but  the  by-laws  may 
deprive  them  of  that  privilege. 

d.  A  stockholder's  liability  is  only  to  the  extent  of  the  amount  due  on 
his  subscription,  excepting,  of  course,  national  bank  stock. 

(IS)  a.  The  United  States  District  Court  has  exclusive  jurisdiction  of 
bankruptcy,  although  some  States  have,  also,  laws  under  which  assign- 
ments may  be  made  by  insolvent  debtors. 

b  A  voluntary  bankrupt  is  one  who  files  a  petition  in  bankruptcy  an 
involuntary  bankrupt  is  one  against  whom  a  petition  in  bankruptcy  is  filed 
by  his  creditors. 

c.  A  corporation  may  not  become  a  voluntary  bankrupt. 

d.  A  partnership  may  become  a  voluntary  bankrupt. 

(16)  a.  The  essential  requisites  of  negotiable  instruments  are  as 
follows : 

1.  The  instrument  must  be  in  writing,  and  signed  by  the  maker 
or  drawer. 

2.  It   must    contain    unconditional    promise    or    order    to    oav   a 
sum  certain  in  money.  f  j    « 

3.  It  must  be  payable  on  demand,  or  at  a  fixed  or  determinable 
future  time. 

4.  It  must  be  payable  to  order  or  to  bearer 
b.    "Order"  or  *' Bearer." 

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Accounting  Problems  and  Solutions. 

(17)  If  the  holder  secures  the  certification  the  drawer  is  discharged 
from  any  liability,  the  bank  becomes  then  the  principal  and  only  debtor. 
The  check  becomes  the  check  of  the  bank  and  is  good  as  long  as  the 
bank  is  solvent.  This,  however,  is  not  the  result  if  the  drawer  himself 
procures  the  certification  before  the  delivery  of  the  check.  In  such  case 
he,  the  drawer,  is  not  released  from  further  liability. 

An  alteration  in  a  negotiable  instrument  without  authority  after  it  had 
been  signed,  destroys  its  validity.  That  is  true,  however,  only  in  case  of 
a  material  alteration. 

(18)  The  object  of  passing  bankruptcy  laws  is  to  protect  creditors,  and 
also  to  help  legitimate  bankrupt  firms  to  begin  business  anew,  if  they 
prove  that  the  failure  was  not  caused  fraudulently. 

A  motion  can  be  made  to  set  aside  such  appointment.  Creditors  are 
the  only  individuals  who  have  a  right  to  vote  in  the  selection  of  a 
trustee.  Only  if  they  fail  to  elect  one,  the  referee  can  exercise  the  right 
to  appointment.  A  trustee  may  be  hostile  to  the  bankrupt,  yet  this  does 
not  disqualify  him. 

( 19)  The  essential  feature  of  a  partnership  is  the  sharing  of  profits.  Of 
course,  the  intention  of  the  parties  at  the  formation  is  to  be  taken  into 
consideration.    Not  necessarily,  but  generally  this  is  the  case. 

(20) 

(a)  A  negotiable  promissory  note  is  an  unconditional  written  promise 

made  by  one  or  more  persons  to  pay  to  another  person  or  to  his 

order  or  bearer  a  sum  certain  in  money  at  a  specified  time. 
(&)  His  liability  is  that  he  will  honor  the  instrument  if  the  maker  does 

not,  provided  it  is  duly  presented  for  payment  and  upon  refusal  is 

duly  protested. 

(21)  A  corporation  is  an  association  of  natural  persons,  or  of  artifical 
persons,  or  of  both  together,  authorized  by  law  to  act  as  a  unit  under  a 
corporate  name,  for  the  accomplishment  of  certain  definite  and  prescribed 
purposes. 

In  general  there  are  two  kinds  of  corporations,  viz.: 

(a)  Public,  and 

(b)  Private. 

There  are,  however,  a  good  many  subdivisions  such  as:  Transporta- 
tion corporations,  stock  and  non-stock  corporations,  moneyed  corpora- 
tions, etc. 

(22)  A  contract  is  an  agreement  between  two  or  more  persons,  compe- 
tent to  act,  founded  on  a  sufficient  and  legal  consideration,  to  do  or  not 
to  do  a  certain  thing. 

The  following  contracts  must  be  in  writing : 

(a)  If  the  contract  by  its  terms  is  not  to  be  performed  within  one 
year  from  the  making  thereof. 


Answers  in  Commercial  Law. 

(b)  Contracts  to  answer  for  the  debt  of  another  person. 

(c)  Contracts  containing  a  promise  in  consideration  of  marriage. 

(d)  Contracts  promising  the  payment  of  a  debt  already  discharged  in 
bankruptcy. 

(e)  A  contract  for  sale  of  lands  or  any  interest  in  them. 

(23)  His  defence  would  be  a  change  in  the  contract  of  guaranty,  with- 
out his  knowledge  or  authorization. 

(24)  No;  it  is  not.  The  most  important  element  of  a  negotiable  in- 
strument is  that  the  time  is  determinable.  In  this  case  the  time  is  un- 
certain as  William  H.  Taft  may  never  be  elected. 

(25)  One-half  must  actually  be  paid  in.  Payment  may  be  made  in 
cash  or  property.  If  in  property  the  same  shall  be  appraised  by  the 
commissioners,  who  have  to  report  the  fair  cash  value  thereof. 

(26)  By  the  term  "  Statute  of  Limitations  "  is  meant  that  the  law  wiU 

refuse  to  enforce  any  action,  not  merged  in  a  judgment  or  discharged  by 

consent  within  a  given  time,  by  reason  of  the  lapse  of  a  certain  time, 

which  varies  in  the  different  states.    Like  the  statute  of  frauds  it  has  for 

its  object  the  discouraging  of  litigation  and  the  suppression  of  perjury. 

The  following  acts  may  prevent  the  statute  from  running  against 
an  ordinary  debt: 

(a)  A  new  agreement,  which  in  some  of  the  states  must  be  in  writing. 

(b)  By  a  payment  on  account  of  principal. 

(c)  By  paying  interest. 

(27)  A  special  meeting  of  the  board  of  directors  must  be  called  on 
three  days'  notice,  and  a  majority  of  the  whole  board  must  adopt  a 
resolution  recommending  dissolution.  The  directors  then  call  a  meeting 
of  the  stockholders  which  must  be  not  less  than  30  nor  more  than  60 
days  after  their  meeting.  Notice  of  this  meeting  must  also  be  published 
at  kast  once  a  week  for  three  weeks  successively  next  preceding  the 
time  appointed  for  holding  the  meeting.  In  order  to  secure  dissolution 
an  approving  vole  of  two-thirds  of  the  outstanding  stock  must  be  secured. 
After  this  vote  is  obtained  certain  forms  of  dissolution  must  be  prepared 
and  filed  with  the  Secretary  of  State. 

When  these  papers  are  accepted  by  the  Secretary  of  State  he  issues, 
in  duplicate,  a  certificate  of  their  filing,  one  copy  of  which  must  be 
published  once  a  week  for  two  weeks,  in  one  or  more  newspapers.  The 
dissolution  of  the  corporation  is  then  complete.  The  directors  act  as 
trustees  for  winding  up  the  business. 

(28)  When  the  buyer  signifies  his  approval  or  acceptance  to  the  seller, 
or  does  any  act  ratifying  the  transaction. 

If  he  neither  signifies  his  approval  nor  acceptance  to  the  seller, 
but  retains  the  goods  without  giving  notice  of  rejection,  then  if 
a  time  has  been  fixed  for  the  return  of  the  goods,  on  the  expira- 

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> , 


Accounting  Problems  and  Solutions. 

tion  of  the  time  so  fixed,  or,  if  no  time  has  been  fixed,  then  on 
the  expiration  of  a  reasonable  time. 

(29)  The  common  law  is  the  oldest  form  of  our  law.  It  was 
derived  primarily  from  the  English  law,  and  established  here  by  the 
early  settlers.  It  is  made  up  of  the  rules  and  customs  which  were  in  use 
from  time  immemorial  and  came  to  be  recognized  as  laws.  Most  of  the 
common  law  is  now  embodied  in  court  decisions. 

Laws  enacted  by  Congress  or  the  Legislature  are  known  as  statute 
laws.  In  some  instances  these  statutes  change  and  modify  the  common 
law.  This  is  often  the  case  when  the  condition  of  the  nation  or  the 
progress  of  the  community  requires  it. 

The  law  merchant,  known  also  as  commercial  law  is  a  branch  of  the 
civil  law,  and  includes  the  law  regulating  the  rights  and  relations  of 
persons  engaged  in  trade  or  commerce,  as  the  law  of  contracts  or 
agency.    It  is  a  more  modern  outgrow. 

(30)  The  taking  of  a  higher  rate  of  interest  than  that  allowed  by  the 
statute  of  a  particular  state  is  called  usury.  The  legal  rate  of  interest 
in  the  State  of  Florida  is  8%,  the  maximum  rate  is  10%  (The  penalty 
for  usury  is  forfeiture  of  all  interest.) 

(31)  A  partnership  is  an  association  of  two  or  more  persons  who 
have  ai^recd  to  combine  their  labor,  property,  or  skill,  for  the  purpose  of 
engaging  in  business  and  sharing  profits  and  losses  between  them. 

General  and  limited. 

A  limited"  partnership  differs  from  a  general  partnership  in  that  the 
liability  of  some  of  the  partners  is  limited. 


PART  IV. 


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216 


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■    >■  -■  _ 

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III 


C.  p.  A.  Elxamination  Papers. 

Below  is  a  reprint  from  The  Journal  of  Accountancy  of  a 
contrast  and  comparison  of  a  few  examination  papers,  given 
by  various  State  Boards  or  Institutes  of  Accoimtants  at  recent 
examinations  for  the  C.  P.  A.  certificate,  with  comments. 

The  following  are  representative  problems  of  the  Pennsylvania  exami- 
nation, held  in  November,  1907: 

(Monday,  November  25,  1907,  9  A.  M.  to  i  P.  M.) 

I.  The  report  to  the  Comptroller  of  the  Currency  by  the  Blank 
National  Bank  on  June  15,  1906,  and  again  on  July  20,  1907,  showed  as 
follows : 

June  IS,  1906,  July  20,  1907. 
Resources. 

Loans  and  Discounts $3i55i,i40.20  $3,670,785.13 

U.  S.  Bonds  to  secure  Circulation  and  U.  S. 

Deposits    547,000.00  450,000.00 

Premiums  on  U.  S.  Bonds 13,000.00  12,000.00 

Bonds,  Securities,  etc 370,244.25  410,570.75 

Banking  House  Furniture,  etc 70,694.16  129,198.80 

Due  from  Banks  and  Bankers  613,753.18  520,734.39 

Royal  Bank  of  Dublin,  Ireland  36,215.48  42,486.15 

Due  from  Approved  Reserve  Agents  537,456.91  472,646.47 

Checks  and  other  Cash  Items 24,247.54  83,411.83 

Exchanges  for  Clearing  House  281,933.18  199,179.10 

Notes  of  other  National  Banks  2,850.00  200.00 

Fractional  Currency,  etc 495-55  1,974.61 

Lawful  Money  Reserve  in  Bank  411,218.15  522,225.80 

Redemption  Fund  with  U.  S.  Treasurer 20,250.00  24,250.00 

Total $6,480,498.60    $6,539,663.03 

Liabilities. 

Capital  Stock  paid  in $600,000.00  $600,000.00 

Surplus  Fund 500,000.00  550,000.00 

Undivided   Profits,  less   Expenses,   etc 115,754.47  109,566.46 

National  Bank  Notes  Outstanding  408,000.00  400,400.00 

Due  to  Banks  and  Bankers  956,437.76  1,119,598.80 

Individual  Deposits  subject  to  Check 3,463,436.50  2,802,915.26 

Certificates  of  Deposit   33,665.00  15,585.56 

Certified  Checks  6,226.71  4,124.50 

Cashier's  Checks  Outstanding 142,978.16  402,472.45 

United  States  Deposits  144,000.00  45,000.00 

Bonds  Borrowed   1 10,000.00 

Notes  and  Bills  Discounted 490,000.00 

Total $6,480,498.60    $6,539,663.03 


219 


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Accounting  Problems  and  Solutions. 

Accounts  current  received  from  the  Royal  Bank  of  Dublin  show  a 
credit  balance  in  favor  of  the  Blank  National  Bank  on  June  15,  1906,  of 
£7^624—8—4,  and  on  July  20,  1907,  of  £9,337— H—^- 

a  You  are  retained  by  the  Board  of  Directors  of  the  bank  to  make 
an  examination  on  July  20,  1907,  and  to  make  an  audit  in  connection 
therewith  of  the  accounts  from  June  15,  1906.  State  how  you  would 
propose  to  carry  out  these  instructions,  describing  your  process  m  the 
order  in  which  you  think  the  several  steps  should  be  taken,  and  discussing 
carefully  each  item  shown  on  the  foregoing  statements,  together  with 
such  other  accounts  appearing  in  connection  with  your  answer  to  part 
id)  of  this  question  as  you  think  should  be  examined. 

b  Do  the  Ledger  balances  against  the  Royal  Bank  of  Dublin  show  the 
correct  status  of  this  account?  How  would  you  prove  that  they  do;  and  if 
you  found  the  balances  stated  above  to  be  wrong,  what  entry  would  you 
make  to  correct? 

c.  Describe  more  fully  the  "Liability  Ledger"  (or  what  is  known  in 
some  banks  as  the  "  Credit  Ledger  "  and  in  others  as  the  "  Lme  Ledger  ) 
and  state  whether  you  think  it  should  prove  with  any  General  Ledger 
Account,  or  be  kept  by  single  entry  purely.  If  the  former,  show  how  yon 
would  accomplish  your  purpose. 

d.  From  the  foregoing  and  your  knowledge  of  banking : 

Outline  a  system  of  accounts  suitable  for  the  Blank  National  Bank, 
describing  (in  sufficient  detail  to  indicate  your  understanding)  the  prin- 
cipal books  and  blanks  used  in  the  several  departments,  but  showing  no 
forms. 

2.  Describe  the  use  and  operation  of  a  Clearing  House. 

3.  State  briefly  the  sources  of  Income  of,— 

National  Banks 
State  Banks 
Savings  Banks 
Trust  Companies 
Building  Associations. 


(Tuesday,  November  26,  1907,  2  P.  M.  to  5  P.  M.) 

II.  You  are  retained  by  the  Appliance  Manufacturing  Company  to 
audit  its  accounts  for  the  year  ending  June  30,  1907,  and  to  prepare  the 
Balance  Sheet,  Trading  and  Profit  and  Loss  Accounts  for  the  year. 

You  are  expected  to  write  a  brief  report  of  not  less  than  200  and  not 
more  than  400  words  dealing  with  your  audit,  showing  its  scope  and 
discussing  any  matters  relating  to  the  accounts  which  may  seem  to  you  to 
be  of  interest. 

The  company  was  incorporated  on  July  i,  1906,  and  its  Balance  Sheet 
on  that  date  showed  as  follows: 


$227,537-27 


$227,537.27 


$16,922.81 
240,172.56 


C,  P.  A.  Examination  Questions. 

Assets. 

Cash  $12,680.92 

Bills  Receivable   2,200.00 

Book  Accounts  Receivable  I9»50i.33 

Merchandise  Material  on  hand 9.554-43 

Expenses  of  Incorporation 500.00 

Book  Accounts  Receivable  in  Suspense 1,983,40 

Good   Will   40,000.00 

Machinery  and  Tools  129,355.01 

Furniture  in  Office  and  Store  11,762.18 

Total  

Liabilities. 

Bills    Payable    $10,901.07 

Book  Accounts  Payable   15,617.04 

Capital   Stock    200,000.00 

Reserves  for  Suspended  Accounts  Receivable 1,019.16 

Total 

The  Trial  Balance  of  June  30,  1907,  was  as  follows: 

Cash  $5,259  80 

Notes  Receivable  5,048.75 

Notes   Payable    

Sales    

Materials  and  Supplies   52,088.94 

Sundry  Merchandise  Bought 2,869.80 

Selling  Wages    22,400.04 

Manufacturing   Wages    88,317.70 

Miscellaneous   Receipts    

Office   Salaries    5,802.50 

Maufacturing   Expenses    I5,353i6 

Office  Expenses   2,496. 14 

General  Selling  Expenses  3, 491.50 

Advertising    2.064.33 

Light,  Heat  and  Power 3,121.97 

Rent  of  Factory 4,000.00 

Rent  of  Store  and  Office  1,860.29 

Repairs  to  Machinery,  etc 845.78 

Delivery  Expenses 2,201.01 

Interest  and  Discount   738.40 

Commissions    5,089.30 

Machinery  and  Tools 132,817.24 

Dividend  (paid  January  10,  1907) 6,000.00 

Furniture,  etc.,  in  Store  and  Office 12,016.45 

Book  Accounts   Receivable    58,935.20 

Book  Accounts  Payable   

Expenses  of  Incorporation   500,00 

Reserve  for  Suspended  Accounts 320,59 

Good    Will    40,000.00 

Capital   Stock   

Accounts  Receivable  in  Suspense 2,316.84 

Total $475,955-73    $475,955-73 


221 


54920 


18,311.16 


200,000.00 


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Accounting  Problems  and  Solutions. 

The  Inventory  of  Merchandise  and  Material  amounts  to  $12,453-90. 
You  discover  the  following  facts  not  disclosed  by  the  books : 

(a)  Invoices  not  entered, — 

Maryland    Steel    Co.,    dated    June    15,    1907, 

for  Steel  $165.00 

York    Safe    and    Lock    Co.,    dated    June    i, 

1907,  for  Office  Safe "O.oo 

Vulcan    Coal    Co.,    dated    May    20,     1907, 

for  Coal  •      42.50    $317.50 

(b)  The  company  made  in  its  shop  for  its  own  use  five  machines,  in 
the  construction  of  which  it  used  material  costing  $525,00,  and  the  me- 
chanics' wages  amounted  to  $750.00. 

12.  A  Company  is  engaged  in  a  business  in  which  it  enters  mto  con- 
tracts to  render  certain  services  for  fifty-two  weeks  for  twenty  dollars, 
payable  eight  dollars  in  cash  and  the  balance  by  installments  on  the  first 
of  each  month.  As  an  inducement  to  customers  it  gives  with  each  con- 
tract an  article  costing  three  dollars,  and  it  allows  the  agent  securmg  the 
contract  to  retain  out  of  the  cash  payment  a  commission  of  $2.50.  Ex- 
perience shows  that  the  cost  of  collecting  the  monthly  installments 
averages  ten  per  cent,  of  the  amount  collected. 

(a)  What  entries  would  you  make  on  the  books  when  the  contract  is 

secured?  ^  ^      u      •       fU 

{b)  How  would  the  accounts  opened  be  disposed  of  by  the  time  tne 

contract  is  closed? 

(c)  You  are  asked  to  change  the  bookkeeping  system  and  open  an 
entirely  new  set  of  books  at  a  date  when  the  records  show,  among  other 
assets  and  liabilities,  1,000  contracts  in  force  with  an  average  of  twenty- 
five  weeks  service  to  be  rendered  on  each  and  installments  amounting  to 
$7,500  outstanding.  What  assets,  liabilities  and  reserves  would  you  set  up 
in  the  new  books  respecting  these  matters?  It  is  not  necessary  to  con- 
sider the  question  of  cancellation  or  breaches  of  contract. 


To  contrast  and  compare  these  papers  with  those  presented  by  other 
boards  the  following  typical  problems  and  questions  arc  given : 
PRACTICAL  ACCOUNTING,  PART  I. 
(New  York,  February  4.  1908,  1.15  to  4-15  P-  M.) 
I    On  July  9,  1907,  Smash,  Slump  &  Company,  bankers,  buy  from  the 
Atlantic  Ocean  Bridge  Company  its  first  5  per  cent.  50-year  gold  bonds, 
dated  July  i,  1907,  interest  payable  semi-annually,  amounting  to  $10,000,- 
000,  at  90  per  cent,  and  interest,  with  a  bonus  of  50  per  cent,  in  common 
stock  of  the  Atlantic  Ocean  Bridge  Company.     On  the  same  date  the 
bankers  form  a  syndicate  for  one  year  to  take  the  bonds  at  92/2  per  cent, 
and  interest  with  the  common  stock  as  a  bonus.    They  make  no  charge  for 
expenses.    The  syndicate  is  formed  as  follows: 

222 


C.  P.  A.  Examination  Questions. 

Jones  &  Company        take  $1,750,000  as  a  participation. 

Smith  Brothers  "       6,000,000      "  " 

Reader  &  Company       "       1,250,000      "  " 

Smash,  Slump  &  Co.    "       1,000,000      "  " 

On  the  same  date  the  bankers  pay  the  Atlantic  Ocean  Bridge  Company 
the  total  amount  due  it  for  the  $10,000,000  of  bonds,  and  carry  the  syndi- 
cate, the  members  of  which  make  no  payments  to  the  bankers. 

On  February  i,  1908,  $6,000,000  of  bonds  are  sold  on  the  stock  ex- 
change at  an  average  price  of  95  per  cent,  less  one-eighth  per  cent,  com- 
mission. On  April  i,  1908,  $1,000,000  of  bonds  are  sold  on  the  stock 
exchange  at  an  average  price  of  94  per  cent,  less  one-eighth  per  cent, 
commission. 

Prepare  statements,  as  follows,  showing  the  bankers'  and  participants' 
accounts  as  they  should  appear  on  the  bankers'  books  at  the  close  of  the 
syndicate : 

(a)  Statement  showing  the  bankers'  account  for  the  purchase  of  the 
securities,  including  transfers  to  syndicate  account  and  profit  thereon. 

(&)  Statement  of  each  of  the  syndicate  members'  accounts  as  they 
should  appear  on  the  books  of  the  bankers,  July  9,  1908. 

(c)  Statements  showing  the  transactions  and  profit  and  loss  on  the 
bankers'  own  participation  account,  assuming  that  the  bonds  are  selling 
at  92^  per  cent. 

In  making  up  these  statements,  no  account  need  be  taken  of  the 
coupons  paid  by  the  Atlantic  Ocean  Bridge  Company,  nor  of  any  interest 
charges  by  the  bankers  to  the  participants'  accounts  or  to  its  own  partici- 
pation account,  as  it  may  be  assumed  that  the  cash  received  for  the  coupons 
by  the  bankers  will  be  sufficient  to  reimburse  them  for  their  advances  to 
July  9,  1908. 

2.  The  bookkeeper  of  a  manufacturing  concern  could  produce  only  the 
following  statement  from  its  records  on  January  i,  1907: 

Manufacturing  expenses   $4,622.89 

Capital   stock    .'  lo^ooo.oo 

Plant  and  equipment  17,500.00 

Gross  sales    g  ^^g  jq 

First  mortgage  bonds   (due  Dec.  zi]' i^7)V.'.\V.\\  i5;ooo.'oo 

Materials  and  supplies  (inventory) 4280^4 

Notes   payable    .   ;;^;^ 

Accounts  receivable «i  42^  2^ 

Accounts  payable  .........'.'.'.  2 436 28 

Interest  on  bonds  (7  months)   ''*.'.'       393  75 

Interest  on  notes  and  accounts  payable 282  40 

c^sh  ;;     832^4 

On  January  i,  1907,  the  management  changes,  and  you  are  later  re- 
tained as  a  public  accountant  to  conduct  an  examination  and  prepare  a 
balance  sheet  as  of  January  i,  1908. 

You  find  that  during  the  preceding  year  the  directors  have  subscribed 
in  cash  to  $7,500  additional  capital  stock  and  have  retired  all  the  notes 
and  old  accounts  payable,  and  that  no  interest  was  paid  on  these  accounts 
for  the  year.    You  also  find  that  the  plant  and  equipment  was  revalued  at 

223 


1* 


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Accounting  Problems  and  Solutions. 

$15  000  and  5  per  cent,  of  this  amount  was  charged  off  to  provide  for 
depreciation,  while  an  additional  2/2  per  cent,  was  ordered  placed  in 
Reserve  Account  to  cover  repairs  and  renewals,  the  entire  7V2  per  cent, 
being  charged  direct  to  Profit  and  Loss.  The  bond  outstanding  fell  due 
on  December  31,  1907,  and  was  paid,  principal  and  interest,  in  cash. 

An  inventory  of  materials  and  supplies  places  their  value  at  $2,328.19, 
the  practice  being  to  charge  all  purchases  direct  to  Manufacturing  Ex- 
penses  and  to  credit  back  the  amount  of  the  inventory. 

The   accounts    payable    (all    for   material   and   non-interest   bearing) 

amount  to  $546.28.  ,1*1 

Of  the  accounts   receivable  January   i,   1907.  $4,968.18  was   collected 

and  the  balance  charged  off  as  uncollectible. 

In  addition  to  the  material  used  from  stock  during  the  year,  and  the 
amount  still  due  for  material  purchased,  the  manufacturing  expenses  were 
$3,720.52,  all  paid  in  cash,  the  total  manufacturing  expenses  being  31  per 
cent,  of  the  gross  sales  for  the  year  ending  January  i,  1908. 

Of  these  91.3  per  cent,  were  collected  in  cash  and  the  balance,  all  of 
which  is  considered  good,  remains  on  the  books  in  accounts  receivable. 

Produce  a  comparative  balance  sheet  of  January  i,  1908-1907,  and 
state  the  amount  of  gross  sales  for  the  year. 

THEORY  OF  ACCOUNTS. 

(February  5,  1908,  9-15  A.  M.  to  12.15  P.  M.,  only.    Ten  questions.) 

A  company  issues  annually  over  10,000  checks  on  three  separate  banks, 

recording  each  one  on  the  check  stub  and  then  transcribing  each  check 

in  detail  on  the  general  cash  book.     Suggest  a  change  in  method  that 

would  facilitate  the  work  and  point  out  advantages  gained. 

What  do  you  consider  the  best  way  of  entering  on  the  books  of  a 
manufacturing  company  the  amount  written  off  to  profit  and  loss  for 
depreciation  on   (o)    buildings,    (&)    large  or  fixed  tools,    (c)    small  or 

expense   tools?  j  •      n- 

What  primary  books  of  account  are  necessary  for  the  proper  and  intelli- 
gent conduct  of  a  small  business  ?    Describe  the  general  form  and  uses  of 

each  book  mentioned.  . 

What  do  you  understand  by  "depreciation,"  and  how  should  it  be 
provided  for  on  the  books  of  a  manufacturing  company  owning  its  plant 
and  equipment?  Wherein  does  depreciation  differ  from  renewals  and 
repairs,  and  can  it  be  avoided  through  any  system  of  bookkeeping? 

What  is  a  reserve  account?  How  may  it  be  properly  established  and 
for  what  purpose  ?  What,  if  any,  contra  account  should  be  maintained  ? 
Under  what  circumstances  should  these  accounts  be  maintained?    Why. 

AUDITING. 
(February  5,  1908,  1.15  to  4.15  P-  M.,  only.    Ten  questions.) 
In  making  an  audit  would  you  consider  it  necessary  to  check  in  detail 
the  postings  of  subsidiary  ledgers?     Explain  fuUy. 

224 


C.  p.  A.  Examination  Questions. 

In  examining  the  books  of  a  railroad  company  for  the  purpose  of 
determining  the  profits  for  a  given  period  only,  what  class  of  expenditures 
should  be  carefully  examined?  State  how  you  would  verify  such 
expenditures. 

Explain  fully  how  you  would  proceed  in  inspecting  and  verifying  the 
bonds  and  stocks  (not  valuation)  owned  by  a  company  whose  books  you 
are  auditing,  stating  the  principal  points  you  would  investigate  in  connec- 
tion with  the  coupons  and  the  names  appearing  on  the  stock  certificates. 

Explain  briefly  what  method  you  would  employ  to  audit  the  accounts 
of  a  firm  whose  books  had  been  kept  by  single  entry. 

What  is  the  difference  between  a  reserve  and  a  reserve  fund?  Give 
examples  of  each. 


Papers  set  by  the  Scottish  Chartered  Accountants'  General  Examining 
Board,  June,  1907. 

GENERAL  BUSINESS  OF  AN  ACCOUNTANT. 
(The  Theory  and  Practice  of  Bookkeeping,  including  the  Preparation 
of  Balance   Sheets,  Profit  and  Loss  Accounts,  and   Partners'  Accounts; 
the    Principles    of    Cost    Accounts;     Joint   Adventure   and    Consignment 
Accounts.) 

(Time  allowed,  for  seven  questions  three  hours.) 
Job  Trader,  merchant,  Greenock,  has  the  following,  representing  the 
capital  in  his  business  at  i  January,  1906,  viz. : 

Cash  in  bank  and  on  hand  £432 

50  puncheons  whisky,  valued  at 375 

4-64ths  of  SS.  Agra,  valued  at  2,000 

Consignments  outstanding,  estimated  to  realize 1,265 

Office    furniture,   valued   at    40 

Book  debts,  considered  good  1,583 

^5,695 
Less — due  to  sundry  creditors  715 

£4,980 

At  this  date  he  assumes  as  a  partner  James  Dealer,  who  pays  into  the 
firm  in  cash  £860,  and  transfers  a  stock  of  2,000  bolls  of  maize  taken  at 
22s.  per  boll. 

The  partners  are  each  to  draw  a  salary  of  £25  monthly,  to  be  allowed 
interest  on  their  capital  at  5  per  cent,  per  annum,  and  to  share  the  profits 
and  losses  equally. 

On  31st  December,  1906,  the  trial  balance  of  the  firm*s  General  Ledger 
is  as  follows: 

Purchases  account    £16,530 

Sales  account   ; £14,998 

Consignment  sales  account   3^264 

Charges  account    184 

225 


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Accounting  Problems  and  Solutions. 

Freight  and  carriage  account  786 

Bills   receivable    640 

Cash   account    4i 

Bank  account   543 

Commission  account  870 

Salaries  account  520 

Interest  and  discount  account 420 

Sales  ledger  account   i»736 

Purchase  ledger  account  572 

Lang,  Brown  &  Co.,  joint  account  (unclosed) 981 

Consignment  per  SS.  Java  3io 

Malay ^^ 

*•  "        Victor    298 

**  "        Burmah    564 

Ships'  revenue  account  280 

Private  ledger  account   i»66s 

Office  furniture  account   40 

£22,630    £22,630 


The  partners'  accounts,  stock  account,  and  ship  shares  account  are 
kept  in  the  private  ledger,  and  during  the  year  this  account  has  been 
debited  with  the  salaries  paid  to  partners,  and  with  the  sum  of  £1,200 
paid  for  the  purchase  of  2-64ths  in  the  SS.  Alma. 

Goods  sent  on  consignment  are  debited  to  the  respective  consignment 
accounts  at  pro  forma  invoice  value,  and  "  Consignment  Sales  Ac- 
count" credited  therewith.  Each  particular  consignment  account  is 
closed  on  receipt  of  final  account  sales,  "Consignment  Sales  Account" 
being   credited   or    debited   with   the   balance   of   profit   or   loss   on   the 

consignment. 

Prepare  a  profit  and  loss  account  and  balance  sheet  of  the  firm's  affairs 
on  the  31st  of  December,  1906,  the  stock  on  hand  at  that  date  being  valued 
at  £3,718 — there  being  due  for  rent  and  taxes  £24,  a  loss  estimated  on 
unclosed  consignments  of  £200,  and  before  profit  or  loss  is  ascertained, 
depreciation  to  be  written  off  the  ship  shares  at  7V2  per  cent,  and  off  the 
office  furniture  at  5  per  cent. 

State  the  distinguishing  points  of  difference  between  the  forms  of 
published  accounts  (a)  usually  adopted  by  a  limited  company  for  trading 
purposes,  (&)  of  a  railway  company,  and  (c)  of  a  county  council 

In  preparing  cost  accounts  for  a  shipbuilding  business,  how  would  you 
treat  payments  made  for  (0)  Ships'  plates;  (&)  Office  and  management 
salaries;  (c)  Wages  of  foreman  carpenter;  (d)  Smithy  coal;  (<r) 
Rivets;    (/)  Paint;    (g)  Riveters' wages? 

The  head  office  of  the  Thames  Soap  Company  is  in  London,  and  the 
Company  has  a  branch  in  Liverpool,  from  which  all  sales  in  the  Lancashire 

226 


C.  p.  A.  Examination  Questions. 

district  are  controlled.  All  goods  sold  in  this  district  are  invoiced  from 
this  Liverpool  office,  and  all  payments  in  respect  of  these  are  received 
there,  the  amounts  falling  due  to  be  lodged  daily  in  bank  to  credit  of  an 
account  operated  upon  from  the  head  office.  The  principal  books  kept 
at  Liverpool  are  a  day  book,  credit  book,  cash  book,  and  ledger.  It 
having  been  ascertained  that  the  Liverpool  agent  had  been  dealing  im- 
properly with  certain  of  the  moneys  collected,  and  had  failed  to  pay  them 
into  the  bank  account  in  the  regular  course,  it  is  resolved  to  transfer  to 
London  the  control  of  all  receipts,  but  to  continue  to  invoice  the  goods 
from  Liverpool. 

Write  a  short  memorandum  of  suggestions  for  an  alteration  of  the 
bookkeeping  system  to  meet  the  altered  circumstances. 


THE  PROCEDURE  AND  REQUISITES  IN  THE  AUDIT 

OF  ACCOUNTS  AND  BOOKS. 

Including  those  of  Public  Bodies,  Companies,  Firms,  and  Trust  Estates. 

(Time  allowed,  three  hours  for  eight  questions.) 

You  are  appointed  auditor  of  an  engineering  company  formed  to  take 
over  an  existing  business.  The  following  is  the  first  balance  sheet  of  the 
company,  made  up  at  the  31st  of  December,  1906,  as  submitted  to  you  for 
audit : 


Liabilities. 

* 

Trade  debts 

Bills  payable 

Due  to  bank 

Customers'  bills  dis- 
counted  ;C3oo 

£z,s^o 
750 

400 

Capital: 
14,000  shares  of  £1 

each ;;£i4,ooo 

Less  calls  in  arrear     170 

13.830 

Profit  and  loss  ac- 

count   

1.550 

;g20,030 


Assets. 

Buildings: 

As  taken  over,  ;^2,ooo 
Added 200 

Plant     and     ma- 
chinery : 
As  taken  over   ;^5,ooo 
Added 600 

Workmen's   tools, 

per  inventory. . . 

Office  furniture,  as 

taken  over 

Stock  in  trade: 
Materials    and 

stores ;^5.5oo 

Work   in    prog- 
ress      1,000 

Trade  debts 

Bills  receivable 

Cash  in  hand 

Preliminary      ex- 
penses  


£2,200 


5,600 

500 
200 


6,500 

4.500 
250 

250 

£20,030 


227 


IS  li 


Accounting  Problems  and  Solutions. 

The  ground  on  which  the  buildings  are  erected  is  held  on  a  twenty 
years'  lease.  The  additions  to  buildings  have  been  done  by  contractors, 
and  those  to  plant  and  machinery  by  the  company's  own  employees.  The 
preliminary  audit  work  having  been  completed,  how  would  you  satisfy 
yourself  that  the  various  items  in  the  balance  sheet,  excluding  the  profit 
and  loss  account,  arc  correctly  stated? 

Assuming  that  you  have  found  the  entries  in  the  balance  sheet  given  in 
the  first  question  to  correspond  with  the  books,  mention  three  points  to 
which  you  would,  before  certifying  the  balance  sheet,  devote  special 
attention,  giving  your  reasons  for  doing  so. 


In  auditing  the  accounts  of  a  charitable  institution,  what  safeguards 
would  you  suggest  to  insure  that  all  receipts  for  subscriptions  and 
donations  were  duly  credited? 

State  in  detail  what  steps  you  would  take  to  check  the  amount  of 
assessment  for  Poor  Law  and  Education  Rate  imposed  and  collected  by 
a  parish  council  collector. 

Very  interesting  in  connection  with  the  Pennsylvania  examination  papers 
is  the  circular  of  information  issued  by  the  State  Board  of  Examiners. 

The  Board  does  not  follow  the  traditional  custom  in  use  since  the  pas- 
sage of  C.  P.  A.  laws  in  various  States,  of  dividing  the  examination  into 
four  subjects  (Theory  of  Accounts,  Practical  Accounting,  Auditing,  and 
Commercial  Law),  but  expects  the  candidate  to  answer  questions  grouped 
under  two  heads — Commercial  Law  and  General  Accounting.  The  latter 
contains  not  only  Theory  of  Accounts,  Practical  Accounting,  and  Audit- 
ing, but  also  Banking,  Governmental  Administration,  Transportation,  etc. 

This  division  is  advisable.  At  the  present  time  one  will  find  a  question 
given  by  a  board  of  one  State  under  Theory  of  Accounts,  while  another 
board  will  give  the  same  question  under  Auditing;  in  some  instances  an 
antiquated  board  will  give  it  under  Practical  Accounting,  as  if  Auditing 
or  Theory  of  Accounts  were  not  Accounting.  In  England  we  find  in  the 
majority  of  examination  papers  given  by  Societies  or  Institutes  questions 
under  the  heading  of  "  General  Business  of  an  Accountant."  Under  this 
heading  is  included  Practical  Accounting  as  well  as  Theory  of  Accounts, 
Auditing  or  any  other  matter  pertaining  to  an  accountant's  work.  We 
find  the  same  order  in  the  case  of  the  examination  papers  of  the  Holland 
Society  of  Accountants.  Among  the  other  subjects  required  of  the  appli- 
cant, we  find  the  subject  Accountancy,  the  latter  including:  (o)  Liter- 
ature; (b)  Bookkeeping;  (c)  Systems;  (d)  Administrative  Statistics; 
(e)  Auditing;    (f)  Estimating;    (g)  Statements- 

Why  should  we  be  an  exception  to  the  general  rule?  It  is  deplorable 
that  wherever  a  bill  is  presented  for  the  enactment  of  a  C.  P.  A.  law, 
the  old  routine  is  followed  and  a  copy  of  some  neighboring  State's 
enacted  bill  is  secured  and  imitated,  regardless  of  the  fact  that  we  progress 
and  should  keep  abreast  with  the  times. 

228 


^■»>  .11  't 


C.  P.  A.  Examination  Questions. 

Another  feature  to  notice  in  the  Pennsylvania  examinations  is  that  the 
papers  contain  exactly  what  the  syllabus  calls  for,  which  is  not  the  case 
in  the  majority  of  the  other  States,  especially  in  the  State  of  New  York. 

To  be  sure,  the  average  standard  of  the  recent  examination  papers  of 
the  State  of  New  York  is  commendable,  more  so  than  the  standard  of 
some  of  the  other  States— although  rather  specialized  than  general, 
chiefly  in  Practical  Accounting.  The  examinations,  however,  are  not 
based  on  the  syllabus  issued  by  the  State.  This  method,  a  syllabus  of  one 
standard  (1896)  and  examinations  of  another  standard  (1908),  is  an 
injustice  to  the  applicants  taking  the  examinations.  What  was  more  than 
enough  in  the  early  outline  of  the  scope  of  examinations  in  accounting 
(1896)  is  not  the  standard  of  the  present  (1908). 

Compare,  for  instance,  some  of  the  descriptions  of  the  requirements  in 
the  New  York  Syllabus  with  those  of  the  Pennsylvania  Syllabus : 

New  York  Syllabus: 

" Banking.— Treatment  of  moneys  received  from  depositors;  pass 
books;  receiving  teller's  records;  listing  check  and  draft  deposits;  de- 
posits from  other  banks;  receiving  teller's  proof.  Paying  teller's  duties; 
certified  check  book;  effect  of  certification  on  indorsements;  limit  of 
certification  by  national  banks;  record  of  paid  checks;  paying  teller's 
proof.  Loans:  legal  procedure  for  national  banks;  offering  book;  dis- 
count register;  charge  ticket;  regular  dealers,  other  borrowers;  discount 
tickler;  time  and  'call'  loans;  loan  tickets;  collection;  protest;  col- 
lection register;  remittance  register;  certificate  of  deposit;  customs  check; 
cashier's  check;  bank  drafts;  third  teller's  proofs.  Procedure  of  general 
bookkeeper;  general  debit  and  credit  books;  general  balance  ledger; 
dealer's  ledger;  dealer's  balance  ledger;  the  'Boston'  ledger;  general 
ledger;  general  proof;  daily  statement.  The  clearing  house.  Reserve 
required  for  national  banks." 

Pennsylvania  Syllabus : 

"Banking.— (i)  National  Banking  System.  (2)  State  Banks  in 
Pennsylvania.  (3)  Savings  Banks  and  Building  and  Loan  Associations 
in  Pennsylvania.  (4)  Trust  Companies  in  Pennsylvania.  (5)  Private 
Bankers  and  Brokers  (Stock,  Bond,  and  Note).  (6)  Foreign  Exchange. 
(7)  Clearing  Houses  (Bank,  Stock,  and  Bond). 

"  (a)  Accounting  Organization  and  Administration,  (b)  Nature  of 
accounts  in  each  and  the  distinctions  between  the  accounts  of  the  different 
classes  of  banking  institutions,  (c)  Nature  of  Bank  audits  and  method 
of  procedure  in  each  of  i  to  6,  inclusive." 

New  York  Syllabus: 

"Manufacturing  Accounts.— Accounts  to  indicate  causes  of 
loss  by  a  firm  whose  sales  and  cost  calculations  indicated  a  profit;  state- 
ment showing  cost  per  machine  of  manufactured  output,  the  gross  manu- 
facturing profit  and  the  final  net  result;  manufacturing  and  loss  and  gain 
accounts   and   balance   sheet    (writing   off   for   depreciation   and   making 

229 


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i 


Accounting  Problems  and  Solutions. 

allowance  for  bad  debts)  from  trial  balance  and  inventories  furnished; 
from  the  cost  sheet  suitable  for  a  manufacturing  business  and  detailing 
the  items  of  expenditure." 

Pennsylvania  Syllabus: 

"Manufacturing.— (i)  Accounting  Organization  and  Adminis- 
tration of  Factories.  (2)  Financial  Accounts  of  Factories.  (3)  Manu- 
facturing Costs.    (4)  Audits." 

The  descriptions  in  the  New  York  Syllabus  cover  the  bookkeepmg 
side,  the  elementary  part,  but  they  certainly  do  not  reach  the  standard 
expected  of  a   C.   P.   A.  who  must  audit  a  modern  banking  institution 

or  a  modern  factory. 

Although  recognizing  the  difficulty  of  being  original  in  questions  or 
problems,  yet  the  frequency  with  which  some  questions  in  Theory  of 
Accounts  of  Auditing  recur  is  to  be  greatly  regretted.  Some  questions 
in  these  subjects  at  recent  examinations  in  some  States  put  a  premium  on 


"cram"  work 


The  Pennsylvania  Syllabus,  however,  is  not  free  from  errors.  In 
recommending  some  good  text  books,  treating  of  elementary  principles  of 
accounts,  the  Board  suggest  Williams  and  Rogers'  "Complete  Book- 
keeping,"  Goodwin's  "Improved  Bookkeeping,"  etc.  A  recommendation 
and  official  endorsement  given  to  these  books  is  inexcusable,  at  least  in  the 
latter  instance.  A  deplorable  practice  prevalent  with  all  State  Boards  is 
the  secrecy  they  maintain  with  regard  to  examination  results.  We  see  that 
in  other  countries  there  are  published  statements  about  the  accounting 
profession,  as  well  as  about  examination  results,  while  here  the  strictest 
secrecy  rules;  one  f^nds  it  occasionally  difficult  even  to  secure  copies  of 
previous  examinations.     What  mystery  the  Board  has  to  conceal  no  one 

can  tell.  . 

To  sum  up  then  the  lesson  we  could  derive  from  the  Pennsylvania  and 

English  papers: 

(1)  The  time  allowed  for  answering  questions  should  not  be  too 
restricted.     The  analytical  ability  of  an  applicant  is  not  disclosed  by  a 

strict  time  limit. 

(2)  Examinations  in  accounting  should  rather  be  treated  under  one 
heading  than  subdivided  into  three  or  more  divisions;  this  single  heading, 
however,  to  include  not  only  accounting  proper,  but  other  matter  which  is 
pertinent  to  an  Accountant's  practice  as  well. 

(3)  State  Boards  should  from  time  to  time  revise  their  syllabi  so  as 
to  keep  abreast  with  the  commerce  and  trade  of  the  day. 

(4)  Publicity  should  be  given  to  all  matters  regarding  the  accounting 
profession  as  well  as  regarding  the  examinations  held  from  time  to  time, 
and  their  results,  so  as  to  raise  the  professional  standing  and  acquaint  the 
public  in  general  with  the  usefulness  of  the  profession. 


230 


C,  P.  A.  Examination  Questions. 

Theory  of  Accounts. 

New  York  Examination,  January,   1906. 

Answer  10  questions  but  no  more.  Answers  in  excess  of  the  number 
required  will  not  be  considered.  Do  not  repeat  questions  but  write  an- 
swers only,  designating  by  number  as  in  question  paper.  Check 
the  number  of  each  one  of  the  questions  you  have  answered.  Each  com- 
plete answer  will  receive  10  credits.  Papers  entitled  to  75  or  more  credits 
will  be  accepted. — ^January  30,  9.15  a.  m.  to  12.15  p.  m. 

1  What  is  a  consignment  account?  How  should  it  appear  on  the  books 
of  the  consignor? 

2  What  is  a  sinking  fund?  How  should  the  account  be  treated  on  the 
books  of  a  corporation? 

3  In  a  set  of  books  in  which  sales  book  and  sales  ledger  are  used,  how 
should  a  sale  of  merchandise  be  treated  when  an  accepted  draft  for  the 
amount  is  given  by  the  buyer? 

4  Define  and  differentiate  the  following  kinds  of  statements:  (a)  trial 
balance,  (b)  balance  sheet,  (c)  statement  of  assets  and  liabilities,  (d) 
statement  of  affairs. 

5  State  briefly  the  proper  manner  of  conducting  the  following  kinds  of 
accounts:    (a)   bills  receivable,   (b)   bills  payable,   (c)   shipment  accounts. 

6  In  what  order  should  the  accounts  be  arranged  as  they  successively 
appear  in  (a)  a  ledger  containing  all  the  accounts  of  a  business,  (b)  a 
ledger  containing  accounts  of  fixed  assets  and  fixed  liabilities,  as  well  as 
special,  nominal  and  summary  accounts? 

7  Describe  the  method  of  determining  the  number  of  shares  of  capital 
stock,  both  common  and  preferred,  held  by  each  of  the  several  stock- 
holders of  a  corporation,  giving  fully  the  titles  of  the  books  wherein  the 
facts  are  registered  and  stating  how  the  books  are  opened  and  operated. 

8-9  Describe  the  process  of  closing  the  books  of  a  corporation  at  the 
end  of  a  fiscal  year,  showing  a  Trading  account  and  a  Profit  and  Loss 
account,  and  explaining  the  treatment  of  reserves  for  depreciation  and  for 
bad  debts,  as  well  as  for  the  surplus  or  deficiency  resulting  from  the 
operations  of  prior  years. 

10  A  corporation  is  organized  with  an  authorized  capital  stock  of  $50,000 
of  which  only  $40,000  is  sold,  and  stock  certificates  issued  therefor.  Two 
conflicting  methods  of  recording  the  capital  stock  on  the  books  are  urged 
by  rival  accountants  as  follows :  (a)  treasury  stock  to  capital  stock  $50,000, 
cash  and  properties  to  treasury  stock  $40,000;  (b)  cash  and  properties  to 
capital  stock  $40,000.     Which  method  is  the  better  and  why? 

11  Explain  the  purpose  and  the  manner  of  keeping  a  private  ledger  as 
part  of  the  financial  books  of  a  firm  or  a  corporation. 

12  A  construction  company  contracts  to  erect  buildings  or  works,  charg- 
ing in  some  instances  a  fixed  price,  and  in  other  instances  the  actual  costs 

231 


Accounting  Problems  and  Solutions. 

plus  a  fixed  percentage  thereon.  How  should  the  contract  accounts  for 
each  stated  class  of  undertakings  be  conducted  on  the  books  of  the  com- 
pany, and  in  what  manner  should  the  unfinished  contracts  at  the  close 
of  each  fiscal  year  be  valued  on  the  balance  sheet  and  treated  in  the  Profit 
and  Loss  account? 

13.  Define  and  differentiate  the  following  kinds  of  accounts :  (o)  real  and 
nominal,  (bJ  personal  and  impersonal,  (cj  current  and  summary,  (d)  con- 
trolling and  specific. 

14  How  may  a  reserve  account  and  a  sinking  fund,  both  relating  to  the 
redemption  of  the  same  debt  be  simultaneously  operated  ?  What  purpose  is 
accomplished  thereby  and  how  do  said  accounts  respectively  appear  on  the 
balance  sheet? 

15  A  manufacturer  makes  extensive  investments  in  stocks  and  bonds, 
buying  and  selling  from  time  to  time  as  the  market  conditions  warrant 
and  clearing  all  such  transactions  through  his  regular  books  of  account. 
How  should  such  transactions  be  isolated  from  his  manufacturing  opera- 
tions and  what  books  and  accounts  should  he  employ  to  record  the  details 
of  the  principal  and  income  from  such  investments? 

Practical  Accounting. 

Answer  questions  i  and  2  and  two  of  the  others,  hut  no  more.  Answers 
in  excess  of  the  number  required  will  not  be  considered.  Do  not  repeat 
questions  but  write  answers  only,  designating  by  number  as  in  question 
paper.  Check  the  number  of  each  one  of  the  questions  you  have  an. 
swered.  Each  complete  answer  will  receive  25  credits.  Papers  entitled 
to  75  or  more  credits  will  be  accepted.   January  30,  1.15  to  5.15  p.  m.,  only. 

I.  The  Parker  Construction  Company  is  unable  to  meet  its  obligations 
and  is  forced  into  liquidation.  At  the  time  the  receiver  takes  charge  of  its 
affairs  the  following  trial  balance  is  prepared  from  the  company's  books: 

Cash $500 

Land  and  buildings 10,000 

Mortgage  on  land   and   buildings $8,000 

Plant  and  equipment 20,000 

Creditors  59-400 

Completed  contract  accounts  (losses) 18,000 

Capital 50,000 

Uncompleted  contract  accounts  (outlay) 30,000 

Securities   acquired   in   settlements i5»ooo 

Debtors'  accounts  for  completed  contracts 6,000 

Expenses    0,500 

Inventory  of  materials 2,000 

Profit  and  loss  (deficiency) 9,400 

$117,400        $117,400 

The  sureties  on  the  unfinished  contracts  estimate  that  a  further  outlay 
of  $20,000  will  be  required  to  complete  the  work  and  realize  the  contract 

232 


C.P.  A.  Examination  Questions. 

price  of  $40,000,  and  their  offer  to  take  over  the  materials  on  hand  for 
$1,500,  as  part  of  said  cost,  is  accepted  by  the  receiver.  Of  the  securities 
acquired  $5,000  is  pledged  to  secure  $11,000  due  creditors,  and  $10,000  is 
pledged  to  secure  $9,000  due  creditors.  The  company  owes  for  taxes 
on  real  estate  $100  and  for  salaries  and  wages  of  employees  $1,200, 
which  sums  do  not  appear  on  the  books.  The  company  has  dis- 
counted customers'  notes  for  $3,000,  of  which  subsequent  ad- 
vices indicate  that  $1,000  will  be  dishonored,  and  a  debtor  owing  $1,500 
on  unsecured  account  has  failed  and  disappeared.  It  is  estimated  that 
the  amount  realized  on  land  and  buildings  will  be  sufficient  to  satisfy 
the  mortgage  only,  and  that  plant  and  equipment  will  realize  only  6% 
of  the  book  value. 

Prepare  a  statement  of  affairs  and  deficiency  account. 

2  Walter  Hopkins,  while  perfectly  solvent  and  doing  a  profitable  manu- 
facturing business,  had  so  tied  up  his  capital  in  plant  and  materials  that 
It  was  unable  to  pay  his  debts  and  was  on  the  point  of  suspending  for 
want  of  funds  to  pay  for  labor,  and  his  creditors  were  preparing  to  com- 
mence legal  proceedings  to  enforce  a  settlement.  The  condition  of  his 
affairs  at  this  time  was  as  follows : 

Balance  Sheet 


Liabilities. 

Creditors    $20,230 

Capital 50,000 

Surplus  4,900 

i 


Assets 

Plant  $25,198 

Cash 212 

Materials,  raw  and  partly 

finished   40,400 

Finished  goods 6,070 

Accounts  receivable 3,250 


$75,130  $75,130 

At  a  meeting  of  creditors  he  said  that  while  his  plant  was  entirely 
efficient,  it  was  all  of  special  character  and  would  realize  on  forced  sale 
only  the  value  of  scrap,  that  the  unfinished  goods  would  require  the  em- 
ployment of  skill  and  processes  known  to  him  only,  and  that  while 
forced  suspension  would  yield  to  his  creditors  not  over  50%,  it  would 
ruin  him  absolutely. 

The  creditors  decided  to  advance  him  a  loan  of  $5,000  to  continue 
operations  and  allow  him  additional  credit  for  materials  and  expenses. 
A  trustee  was  appointed  to  see  that  the  proceeds  were  used  solely  for 
recuperation  of  the  business. 

The  subsequent  operations  under  the  supervision  of  the  trustee  were 
as  follows: 

Purchases  on  book  account  charged  to  materials  $5,100,  to  expense, 
$12,000 ;  sales  on  book  account,  $57,802 ;  losses  on  bad  debts,  $300 ;  cash  re- 
ceipts (loan  from  creditors),  $5,000;  settlement  from  debtors,  $58,100; 
cash  payments  for  labor.  $12,500;  for  expense,  $4,350;  for  plant,  $600. 
Creditors,  $42,030;  Walter  Hopkins,  personal  drawings,  $3,000. 

There  remained  raw  materials,  $4,000,  finished  goods  $22,388. 

Prepare  (a)  realization  and  liquidation  account,  (&)  trustees*  cash 
account,   (r)   balance  sheet  of  the  estate  as  restored  to  Walter  Hopkins. 

233 


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Accounting  Problems  and  Solutions, 

3  The  following  statements  comprise  the  trial  balances  of  a  busmcss 
at  the  beginning  and  the  end  of  a  fiscal  period,  together  with  the  volume 
of  the  transactions  during  said  period: 

Trial  Balance,  Interim  Trial   Balance, 

January  i.  Transactions.         DecemDer  31. 

,     Cash     $i.xi5  $24,941     $24,696      $1,360 

I  Merchandise     5.050  17.665       26.874  $4.iS9 

3     Debtors      3.iio  25.135       24."9         4.oi6 

i  Fixtures   2,800  505  3.505 

5  Creditors     1-575       18.922  19,410  2,063 

6  Loan    (Int.   pd.    $6) 50o  1,000  1,500 

7  Capital    10.000  .  ,^            ,„       "•°°** 

8  Interest  and   Discount    ..  693  360  333 

9  Rent     900  900 

10  Insurance     ,    5  o  a 

II  Salaries     ''^^o  1,820 

la  Advertising     900  900 

,3  Carting     ,^'705  i.705 

14  Expense     »'333  1.333 

I?    Drawings,    proprietor    ... 2^    2,000   

$12,073     $12,075     $96,569     $96,569     $17,722     $17,722 
a  The  sales  book  shows  sales  posted  to  debtors  to  the  amount  of 

$25,135.  ,       , 

b  The   journal    shows   allowances   to   debtors   for  returns   of  mdse. 
sales  $1,015  and  claims  on  creditors  for  returns  of  mdse.  pur- 
chases  $230,    also    application    of     debtors*     balance    to     settle 
creditors'  account  in  the  amount  of  $9,500.  both  accounts  being 
in  the  name  of  the  same  correspondent. 
c  The  ledger  shows  that  the  nominal  accounts  entitled  Rent,  Insur- 
ance  and   Office   Salaries   contain  only  cash   charges,   while  the 
nominal    accounts   entitled    Advertising,    Cartage,    and    Expense 
show  cash  charges  in  the  total  amounts  of  $100,  $200,  and  ^773 
respectively,    all    other   charges    therein    being    by    invoice    duly 
posted  to  creditors'  accounts. 
rf.The  Merchandise  account   shows  cash  charges  of  $610  and  cash 
credits  of  $1,509  for  cash  purchases  and  cash  sales  respectively. 
e  The  invoice  books  shows  invoices  posted  to  creditors'  accounts  to 
the   amount   of   $19,410. 
From  the  foregoing  statement  of  facts  write  the  several    accounts  dis- 
played in  the  trial  balance,  showing  the  elements     composing     each     ac- 
count stated  according  to  the   itles  of  the  accounts  complementary  thereto. 
4-5  A  corporation  issues  $100,000  in  20-year  bonds,  dated  January   i, 
1902,  redeemable  out  of  revenue  by  means  of  20  annual  sinking  fund 
instalments  of  $5,000  each.    December  31,  1902,  $5,000  is  reserved  out  of 
profits  and  placed  to  the  credit  of  Reserve  for  Redemption  and  $5,000 
is  deposited  in  a  trust  company  @  2%  and  charged  to  Sinking  Fund  for 
Redemption.     Separate  sinking  fund  books  are  opened  in  the  ledger  m 
which  Cash  is  charged  and  Sinking  Fund  credited  with  said  first  mstal- 

February  2,  1903,  investments  are  purchased  for  the  sinking  fund  and 
the  principal' thereof  is  charged  on  the  sinking  fund  books  to  separate 
investment  accounts,  while  the  accrued  interest  is  charged  to  Revenue 
from  Investments. 


C.  P.  A.  Examination  Questions. 

The  investments  so  purchased  are  as  follows : 
a  Two  (2)  5%  gold  bonds,  due  1950,  of  $1,000  each,  interest  payable, 

May  I,  Nov.  2,  (^  par  and  accrued  interest. 
b.One  (i)  6%  gold  bond,  due  1940,  of  $1,000,  Apr.  i,  Oct.  i,  @  120 

and  accrued  interest, 
f  .The  company  loans  on  first  mortgage  $1,400  @  5%  interest,  payable 
Aug.   I,   Feb.   I. 
The  interest  is  regularly  received  and  deposited  in  the  special  account, 
charged  to  Cash  and  credited  to  Revenue  from  Investments,  which  latter 
account  is  in  turn  closed  by  transfer  of  balance  to   Sinking  Fund   for 
Redemption. 

December  31,  1903,  the  second  annual  reserve  is  made  in  the  amount 
of  $5,000,  less  the  net  income  of  the  sinking  fund  for  the  expired  current 
year  as  shown  by  the  sinking  fund  books,  and  a  corresponding  deposit 
is  made  in  the  special  fund,  while  the  proper  entries  of  the  receipt 
thereof  are  also  made  and  posted  in  the  sinking  fund  books.  March  i, 
1904,  two  (2)  6%  bonds  of  the  same  issue  as  purchased  in  the  previous 
year  are  bought  for  the  sinking  fund  @  116  and  accrued  interest,  one 
(i)  of  the  5%  bonds  is  sold  @  103  and  accrued  interest,  and  a  first 
mortgage  for  $3,500  @  5%  March,  i  and  Sept.  i,  is  purchased.  The  6% 
bond  bought  in  1903  and  held  at  120  is  written  down  to  116,  and  the 
remaining  5%  bond  held  at  par  is  written  up  to  103  by  cross  entry 
between  the  principal  account  and  the  Revenue  from  Investments  account. 
December  31,  1904,  the  third  instalment  is  reserved  and  deposited  in 
the  same  manner  and  on  the  same  principle  as  the  preceding  ones. 

Frame  the  necessary  journal  entries  on  both  the  general  and  the  sinking 
fund  book  to  give  expression  to  the  foregoing  transactions;  also  the 
accounts  affected  in  both  ledgers  showing  the  status  of  sinking  fund  at 
the  beginning  of  1905. 

6  Fredericka  Ward  dies  leaving  one  daughter,  Doris,  and  two  sons, 
Henry  and  Arthur,  all  of  age,  surviving  her.  Her  will  directs  that  after 
the  discharge  of  all  just  claims  on  her  estate  there  shall  be  placed  in 
trust  for  Fredericka  Winter,  the  child  of  her  deceased  sister,  $50,000,  the 
income  of  which  is  to  be  used  for  the  child's  support  by  the  guardian 
appointed  under  the  trust,  and  the  principal  to  be  paid  over  to  her  when 
she  becomes  of  age.  The  remainder  of  the  estate  is  to  be  divided  equally 
among  the  testator's  three  children. 

The  estate  consists  of  cash  in  a  trust  company  $12,500,  bonds  and 
mortgages  on  real  estate  $250,000;  registered  municipal  bonds  $90,000, 
household  furniture  appraised  at  $20,130,  horses  and  carriages  appraised 
at  $3,000,  clothing  appraised  at  $2,200  and  jewelry  appraised  at  $7,400. 

One  of  the  aforesaid  mortgages,  $50,000  @  5%,  is  in  arrears  of  interest 
for  one  year,  and  foreclosure  proceedings  are  commenced  by  the  executor 
with  the  result  that  on  an  immediate  settlement  the  estate  realizes  the 
principal  and  the  interest  so  in  arrears  and  the  trust  fund  is  paid  over 
to  the  guardian  of  Fredericka  Winter.  The  February  and  August  semi- 
annual instalments   of  interest  at  5%   on  the  two   remaining  mortgagees 

235 


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1     ^H 

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Accounting  Problems  and  Solutions. 

of  $100,000  each  and  the  January  and  July  interest  on  the  registered  4% 
bonds  are  all  duly  received,  and  the  bonds  are  forthwilh  sold  for  $90,190. 
The  executor  then  pays  $30,000  to  Doris,  and  $10,000  each  to  Henry  and 
Walter  respectively,  on  account  of  their  interests.  Doris  takes,  as  a  part 
of  her  legacy,  household  furniture  $5,000,  clothing  $900,  and  all  the 
jewelry  at  the  appraised  valuation.  Each  of  the  sons  takes  as  part  of 
his  legacy  one  of  the  remaining  bonds  and  mortgages. 

On  the  sale  of  the  remaining  effects  the  furniture  realizes  $15,000,  the 
clothing  $1,000,  and  the  horses  and  carriages  $3,200.  There  is  also 
received  from  the  trust  company  for  interest  on  deposit,  $350.  The 
executor  expended  for  probate  $150,  funeral  $600,  monument  $1,000,  tax 
on  personal  estate  $350,  counsel  fees  $1,500,  fire  insurance  $32  and 
sundry  claims  against  the  estate  $7,201.  The  allowance  for  executor's 
fees  was  fixed  by  the  will  at  $2,500. 

Prepare  a  summary  accounting  showing  the  cash  in  hands  of  executor 
and  the  amount  payable  to  each  of  the  heirs. 


Auditing. 

Atiswer  10  questions  but  no  more.  Answers  in  excess  of  the  number 
required  will  not  be  considered.  Do  not  repeat  questions  but  write  an- 
swers only^  designating  by  number  as  in  question  paper.  Clieck 
the  number  of  each  one  of  the  questions  you  have  answered.  Each  com- 
plete answer  will  receive  10  credits.  Papers  entitled  to  75  or  more  credits 
will  be  accepted.   January  31— 9.15  a.  m.  to  12.15  p.  m.,  only. 

1-2  A  company  was  organized  in  February,  1900,  for  the  purposes  of 
constructing  and  operating  two  iron  furnaces  as  one  plant,  and  of  owning 
and  mining  ore  properties. 

An  issue  of  mortgage  bonds  was  arranged  for  the  purpose  of  providing 
funds  to  finance  the  constructing  of  the  plant  and  the  purchase  and 
development  of  ore  properties.  The  mortgage  provided  that  the  property 
should  be  maintained  by  the  company  in  first  class  condition. 

The  first  furnace  was  put  in  blast  in  May,  1901,  and  the  second  in  June, 
1902.  The  ore  property  was  developed  and  mining  commenced  in  April, 
1901,  at  which  date  the  total  cost  of  the  property  and  development 
amounted  to  $50,000.  The  superintendent  of  the  plant  reports  monthly 
the  quantities  of  ores  and  materials  received,  and  also  the  quantities  used 
at  the  furnaces.  Stores  accounts  are  kept  for  each  kind  of  ore  and 
material.  Piles  of  ores  and  materials  are  cleaned  up  periodically.  The 
plant  superintendent  also  reports  the  quantities  of  pig  iron  produced 
monthly  and  the  quantities  of  pig  iron  shipped  monthly. 

January  2,  1905,  you  are  appointed  in  the  interest  of  the  bondholders 
and  shareholders  to  audit  the  accounts  of  the  company  for  five  years 
ending  February  28,  1905. 

Apart  from  the  accuracy  of  the  clerical  work  and  bookkeeping,  what 
ire  the  principal  points  to  be  ascertained  with  regard  to  (a)  expenditures, 
ih)  issue  of  bonds,   (c)  maintenance  of  the  properties?     State  how  you 

236 


C.  P.  A.  Examination  Questions. 

would  satisfy  yourself  of  the  accuracy  of  the  following  assets  and  liabili- 
ties at  the  close  of  the  period  of  your  examination:  stocks  of  ores  and 
materials,  stock  of  pig  iron,  mortgage  bonds  outstanding,  capital  stock 
outstanding. 

3  What  is  a  voucher  and  what  is  your  understanding  of  its  purpose? 

4  How  would  you  determine  the  profits  for  a  given  period  from  a  set 
of  books  kept  on  the  single  entry  system,  the  capital  at  the  beginning  of 
the  period  being  known? 

5  In  drawing  up  a  balance  sheet  is  it  desirable  to  show  the  assets  and 
liabilities  by  groups,  and  if  so,  into  what  groups  would  you  classify?  Give 
reasons  for  your  classification. 

6  You  are  appointed  to  audit  the  accounts  of  the  trustees  of  the  late 
C  D.,  who  were  designated  in  his  will.  His  estate  consisted  of  cash, 
real  estate,  U.  S.  government  bonds,  shares  in  various  enterprises,  mort- 
gages on  real  estate  and  a  partnership  interest  in  a  manufacturing  firm. 
What  documents  and  records  would  you  need  to  see  in  order  to  satisfy 
yourself  that  the  accounts  were  properly  stated  and  the  interests  of 
the  beneficiaries  properly  administered? 

7  Should  inventories  of  a  manufacturing  concern  be  taken  at  cost 
value,  at  market  value  or  at  some  other  value?   Give  reasons. 

8  A  factory  makes  large  outlays  during  a  year  for  alterations  to  plant. 
How  would  you  treat  such  expenditures  ? 

9  When  sales  are  made  on  time  with  the  proviso  that  certain  discounts 
are  to  be  allowed  if  payment  is  made  on  or  before  specified  dates,  would 
you,  when  auditing  the  accounts,  make  provision  for  such  discounts  on 
outstanding  accounts?  Give  reasons  and  an  argument  for  or  against  the 
practice. 

10  A  contractor  engages  to  erect  a  building  for  $250,000,  and  his  esti- 
mates indicate  a  profit  to  him  of  $25,000  in  the  transaction.  He  receives 
during  the  fiscal  year  payments  aggregating  $85,000  on  architect's  certifi- 
cates, showing  that  $100,000  worth  of  work  has  been  done.  Ought  any 
of  the  contemplated  profits  to  be  carried  into  the  accounts  for  that  year, 
and   if  so,   how  much? 

11  What  is  the  responsibility  of  the  accountant  who  undertakes  to 
examine  a  going  business  for  the  purpose  of  issuing  a  certificate  showing 
the  net  earnings  of  the  business  for  the  preceding  five  years  to  (o)  the 
owners,  (b)  those  investing  money  therein  on  the  faith  of  the  report? 

12  In  auditing  the  accounts  of  a  corporation  what  special  precautions 
would  suggest  an  inspection  of  the  minute  books,  the  stock  ledger,  the 
bond  register,  and  a  review  of  certain  initial  entries  relating  to  the 
company's  formation  at  a  date  prior  to  that  covered  by  the  immediate 
audit? 

13  To  what  extent  may  the  "  organization  expenses  "  of  a  corporation 
be  regarded  as  a  permanent  asset  and  how  should  this  account  accordingly 
be  dealt  with? 

237 


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Accounting  Problems  and  Solutions. 

14  Why  should  the  auditor  compare  all  payments  with  proper  vouchers, 
show  agreement  between  cashbook  balance  and  bank  balance  and  recon- 
ciliation of  check  book  and  bank  pass  book? 

15  Show  in  a  general  way  what  care  should  be  exercised  and  what 
work  done  by  an  auditor  in  establishing  the  accuracy  of  pay  rolls  of  factory 
hands  or  other  laborers,  schedules  of  bills  and  accounts  receivable,  and 
schedules  of  stocks,  bonds  or  other  securities. 


Commercial  Law. 

Answer  10  questions  but  no  more.  Answers  in  excess  of  the  number 
required  will  not  be  considered.  Do  not  repeat  questions  but  write  an- 
swers only,  designating  by  number  as  in  question  paper.  Check  the  number 
of  each  one  of  the  questions  you  have  answered.  Each  complete  answer 
will  receive  10  credits.  Papers  entitled  to  75  or  more  credits  will  be 
accepted.— ]2in\i?,Ty  31,  1.15  to  4:15  P-  "i.,  only. 

1  What  is  a  contract?    Mention  five  requisites  of  every  binding  contract. 

2  Define  insolvency  and  bankruptcy.  Mention  (a)  two  acts  of  bank- 
ruptcy, (b)  two  classes  of  persons  who  are  exempt  from  mvoluntary 
bankruptcy. 

3  What  is  the  true  nature  of  the  relationship  between  partners?  To 
what  extent  has  a  partner  the  right  to  sell  the  goods  of  the  firm? 

4  How  may  a  partner  retiring  from  a  firm  relieve  himself  of  further 
partnership  responsibility  ? 

5  Prepare  a  copartnership  agreement  that  shall  provide  for  continuance 
for  a  period  of  five  vears  notwithstanding  the  death  of  one  of  the  partners 
in  the  meantime,  and  provide  also  for  payment  of  interest  on  mvestments, 
salaries  to  partners  and  a  method  of  determining  and  apportionmg  profits 
and  losses. 

6  A  meeting  B  on  the  street  tells  him  to  send  to  his  hotel  15  barrels 
of  a  certain  brand  of  flour  that  B  is  selling  at  $5  a  barrel.  The  men  separate 
without  further  talk  and  the  next  day  the  flour  is  sent  to  A.  Is  he  obliged 
to  take  it?   Give  reasons. 

7  What  is  a  corporation?  Describe  tW  procedure  necessary  for  the 
formation  of  a  business  corporation  and  show  what  is  required  as  to  (a) 
number  of  incorporators,  {b)  number  of  directors,  {c)  capital  to  be  paid  m. 

8  May  directors  of  a  corporation  convey  the  property  of  the  corporation 
to  themselves?    Give  reasons. 

9  For  what  kind  of  property  may  a  corporation  issue  its  capital  stock  m 
payment?    Explain  fully. 

10  When  the  capital  of  a  corporation  is  increased,  what  persons  have 
the  prior  right  to  subscribe  for  the  new  stock  and  in  what  proportions? 
May  such  right  be  made  negotiable  and  if  so,  how? 


C.  P.  A.  Examination  Questions. 

11  Distinguish  clearly  and  fully  between  assignability  and  negotiability. 
Mention  (a)  a  negotiable  instrument,  (^7)  an  assignable  instrument  that 
is  not  negotiable. 

12  Prepare  the  following  negotiable  instruments,  giving  the  name  of  the 
maker  or  drawer  and  the  payee:  (a)  promissory  note,  (&)  bill  of  exchange 
drawn  in  New  York  on  a  banking  house  in  London,  {c)  check. 

13  C  pays  a  note  that  apparently  bears  his  signature  as  maker.  Later 
he  finds  that  the  signature  was  forged.  May  he  recover  the  money  paid? 
State  the  principal. 

14  Give  pro  forma  illustrations  of  the  following  indorsements  of  promis- 
sory notes  and  show  the  purpose  and  the  effect  of  each  indorsement :  (o) 
in  full,  {b)  conditional  (c)  restrictive,  {d)  protest  waived,  {e)  qualified. 

15  What  is  the  legal  rate  of  interest  on  ordinary  loans  of  money  in  the 
State  of  New  York?  Are  bankers  empowered  to  take  a  higher  rate  on 
discounting  ordinary  paper?  Under  what  conditions,  if  any,  may  a 
banker  take  whatever  rate  of  interest  is  agreed  on  by  the  borrower  ?  What 
are  the  penalties  for  taking  usurious  interest?  What  is  the  general  rule 
for  computing  interest  on  an  account  on  which  payments  are  made  from 
time  to  time  when  no  special  stipulation  has  been  expressed  ? 


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Accounting  Problems  and  Solutions. 

Practical   Accounting. 
Illinois  Examination.  May,   1906. 

Monday,  May  7.  i9o6,  9-30  a.  m.  to   12.30  p.  m..  and  1.30  p.  m.  to 

4.30  p.  m. 

75  credits  to  pass,  out  of  a  possible  100  credits. 

Each  complete  answer  will  receive  16  2-3  credits.  Do  not  repeat 
questions  on  examination  papers,  but  write  answers  only,  designatmg 
the  questions  by  number.  The  intelligence  indicated  by  answers  will 
be  considered  in  marking  the  applicams.  as  well  as  the  technical  accuracy 
of    such   answers. 

(i)  In  connection  with  your  general  merchandise  business,  you  are 
a  managing  partner  on  a  joint  account,  where  your  one-half  of  mer- 
chandise cost  was  $15,000.00.  Charges  posted  $150.00.  Total  Sales 
$8,000.00,  and  Joint  Unsold  Merchandise  $13,500.00.  Settlement  charges 
were-     Storage   $60.00.     Commission  5%   on   Sales. 

Prepare  ledger  account,  and  show  journal  entries  closing  the  ac- 
count on  your  books,  you  giving  your  partner,  Robert  Bailey,  your 
note   for  his   one-half  of  net  proceeds. 

Suppose  your  one-half  first  cost  was  $10,000.00.  Charges  were 
$9,000.    Sales  $4,500.00.    Storage  $20.00.    Joint  Property  unsold  $2,100.00. 

Commission  5%.  .         ,    •        ^l 

Prepare  ledger  account,  and  show  journal  entries  closing  the  ac- 
count on  your  books,  charging  Bailey  with  his  share  of  the  deficiency. 

(2)  A  branch  office  business  was  started  the  first  of  the  year,  the 
head  office  advancing  $5,000  cash.  During  the  first  year  merchan- 
dise  was  shipped  to  branch,  invoiced  at  $75,000.00. 

An  auditor  checking  up  the  business  at  the  close  of  the  year,  hnds 

the    following:—  .  r  j     ^^or 

Merchandise  sales  were  $60,000.00,  with  selhng  pnce  of  goods  20% 

advance  on  invoice. 

Proper  vouchers  were  on  file  duly  receipted  for  following  payments  :— 

Rebates  and  allowances  on  damaged  goods $1,500.00 

Salaries  and  other  expenses 4,500.oo 

Freights 2,500.00 

The  books  also  showed  :— 

Remittances  to  head  office $35,000.00 

Uncollected  accounts 15,000.00 

the  balance  of  the  sales  having  been  realized  in  cash,  less  rebates  and 

allowances  as  noted.  ,      .      .u  vu 

The   cash   on  hand   and   inventory  of  unsold   goods,   together   with 

the  foregoing  records,  properly  account  for  everything. 

Prepare  statement,  such  as  an  auditor  would  make  in  reporting  to 

the  head  office,  balancing  the  business  of  the  branch  house. 

(3)    John  Smith  dies  on  October  15,  iQOi,  leaving  a  will  in  which 

he  names  certain  legacies,  which,  in  the  aggregate,  amount  to  $50,000.00. 

240 


I 


C.  P.  A.  Examination  Questions. 

The  executors  are  then  instructed  (i)  to  use  their  best  judgment  in 
the  disposition  of  such  assets  as  may  be  necessary  to  liquidate  all  his 
liabilities;  (2)  to  pay  to  his  widow  Mrs.  Sarah  Smith  an  allowance  at 
the  rate  of  $8,000.00  per  annum  from  the  date  of  his  death  to  the  date 
of  the  distribution  of  the  residue  of  his  estate;  and  (3)  to  distribute  the 
residue  of  the  estate  after  all  claims  and  legacies  have  been  met,  as  fol- 
lows:— 1-3  to  his  widow  and  2-3  to  certain  trustees  named  in  the  will. 

After  his  death  the  executors  drew  up  an  inventory  of  the  estate, 
which,  upon  being  appraised,  shows  the  following  condition: — 

ASSETS. 

Real  Estate $589,000.00 

Corporation  Stocks  320,000.00 

Bonds  with  premium  added 460,928.00 

Bills  Receivable  3,482.00 

Land  Contracts  37,500.00 

Interest   Accrued   on   Bonds,    Bills   Receivable 

and  Land  Contracts 7,890.00 

Accounts  Receivable  2,000.00 

Cash    29,000.00 

LIABILITIES. 

Mortgage  on  improved  City  Real  Estate $  50,000.00 

Bills   Payable 150,000.00 

Accounts   Payable   1,980.00 

Funeral   Expenses 1,000.00 

Interest  Accrued  on  Demand  Notes 1,200.00 

Smith  had  endorsed  the  note  of  Joseph  Stevens  for  $15,000.00  and  had 
discounted  same  with  his  bankers.  Upon  the  note  coming  due,  Joseph 
Stevens  failed  to  meet  same.  The  bank  filed  a  claim  against  the  estate 
of  John  Smith  for  the  amount,  which  was  duly  paid  by  the  executors. 

It  is,  however,  believed  that  in  course  of  time  this  note  of  Joseph 
Stevens  can  be  realized  upon.  One  year  exactly  after  the  death  of 
John  Smith,  the  executors  distribute  the  residue  of  the  estate,  and 
close  the  books.  The  following  transactions  in  addition  to  those  enu- 
merated or  suggested  above,  have  taken  place  during  the  year. 

75  Bonds  Par  $1,000.00  and  inventoried  at  no  were  sold  at  108  3-4. 
300  Shares  Par  $100.00  and  inventoried  at  85  were  sold  at  90. 
400  Shares   Par  $100.00  and  inventoried  at  90  were  sold  at  an  in- 
crease of  10%  of  their  inventory  valuation. 

The  Real  Estate  which  was  encumbered  by  a  mortgage  of  $50,000.00 
was  sold  by  consent  of  the  Probate  Court  and  of  the  widow 
for  a  sum  of  $35,000.00  in  excess  of  the  mortgage,  the  pur- 
chaser assuming  the  mortgage. 

The  profits  arise  from  the  following  sources: 

Dividends    $15,000.00 

Interest  on  Bonds 18,500.00 

241 


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i'f.l 

"if 


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I 


: 


4 


Accounting  Problems  and  Solutions. 

Interest  on  Bills  Receivable  and  Land  Con- 
tracts      2400.00 

Net  Rentals  after  paying  Taxes,  etc 9,000.00 

The  charges  consist  of  the  following  items: 

Office  Expenses  $5,000.00 

Interest  on  Mortgage  and  Bills  Payable 4,750.00 

Premium  on  Bonds  written  off 2.000.00 

Executors'  Fees  allowed  by  G)urt 15,000.00 

The  accrued  interest  on  bonds,  bills  receivable  and  land  contracts 
at  the  close  of  the  executors'  term  of  office  is  found  to  amount  to 
$6,100.00. 

Set  up  journal  and  cash  book  entries  and  ledger  accounts,  and 
prepare  suitable  summarized  statement  of  executors'  transactions  for 
presentation  to  the  beneficiaries. 

(4)  A  manufacturing  company  that  had  been  in  business  for  a  num- 
ber of  years,  began  operations  the  first  of  a  certain  year  in  an  entirely 
new  plant,  built  to  last  20  years,  the  building  of  which  was  made  neces- 
sary by  wear  and  tear  and  obsolescence  affecting  the  old  plant.  The 
new  equipment  cost  $200,000.00,  for  which  the  company  issued  10  ob- 
ligations of  $20,000.00  each  at  6%,  maturing  the  first  of  each  year  fol- 
lowing the  date  of  their  occupancy  of  the  new  plant.  The  old  plant 
has  been  disposed  of  at  a  scrap  value  of  $10,000.00  when  it  was  vacated,  at 
which  time  the  balance  sheet  of  the  company  showed : 

ASSETS 

Plant    $225,000.00 

Less  scrap  value 10,000.00      $215,000.00 

Other  Assets  80,000.00 

$295,000.00 

LIABILITIES. 

Capital  Stock  $200,000.00 

Surplus    50,000.00 

Profit  and  Loss 25,000  00 

Gross  Sales  for  year $100,000.00 

Less  Operating  Expenses 75,000.00 

Floating  Debt  20,000.00 

$295,000.00 

The  new  plant  was  at  once  added  to  the  asset  values  at  $200,000.00, 
and  the  company's  liability  on  its  obligations  shown  for  the  same  amount 

Owing  to  competition  and  limited  use  of  the  products,  the  sales  have 
been  uniform  for  a  number  of  years,  and  could  not  be  expected  to  in- 
crease, but  the  new  and  improved  machinery,  with  better  methods  of  manu- 

242 


C.P.  A.  Examination  Questions. 

facture,  saves  10%  in  operating  expenses  (including  therein  6%  interest 
on  the  borrowed  money)   by  their  method  of  accounting. 

The  books  have  shown  a  net  earning  of  $25,000.00  per  year  as  fol- 
lows: 

Gross  Sales  $100,000.00 

Operating  Expenses: 

Manufacturing  Expenses 

Repairs  " 

Selling 

General  "  75,000.0a 

Taxes 

Insurance 

Ground  Lease  Rentals 

Net  $25,ooo.oa 

At  the  close  of  the  first  year's  operations  of  the  new  plant,  the  bal- 
ance sheet  showed  as  follows: 

ASSETS 

Plant   $4i5,ooo.oa 

Other  Assets  112,500.00 

$527,500.00 

LIABILITIES 

Capital  Stock  $200,000.00 

Surplus    75,000.00 

Profit  and  Loss  32,500.00 

Sales  for  year $100,000.00 

Less  Operating  Expenses  67,500.00 

Notes  Payable  200,000.00 

Floating  Debt  20,000.00 


$527,500.00 
The  balance  sheet  is  submitted,  and  a  dividend  declared. 
Discuss  all  the  foregoing,  and  illustrate  your  conclusions,  and  draw 

up  statement  showing  what,  in  your  opinion,  is  the  true  condition  of  the 

company. 

(5)  Two  printing  and  stationery  houses  decided  to  combine  their 
businesses  for  the  purpose  of  reducing  expenses.  An  accountant  is 
called  in  to  examine  the  books  of  each  company  and  to  report  upon 
the  financial  condition  of  each  and  also  upon  the  past  profits.  Owing 
to  the  fact  that  corporation  A  has  never  separated  its  purchases  as 
between  its  retail  and  its  manufacturing  department,  he  finds  it  im- 
possible to  prepare  a  combined  profit  and  loss  account  showing  the  gross 
profit  of  the  retail  departments  and  the  manufacturing  departments  of 
each  company.  The  following  statement,  however,  exhibits  a  summary 
of  their  combined  trading  accounts: 

243 


Accounting  Problems  and  Solutions. 


$372,000.00 


Total  Sales  

Cost  of  Material  in  Goods  Sold $185,000.00 

Manufacturing  Labor 64,000.00       249,000.00 


Gross   Profit 

Less  Total  Expenses 


$123,000.00 
93,000.00 


Net  Profit  $30,000.00 

The  amalgamation  is  effected,  and  after  carrying  on  the  business  for 

twelve    months    an    inventory    is    taken    and    the    books    closed.      It    is 

found   that   instead   of   realizing  a   profit  of  $30,000.00,   they  have   only 

mad.;  a  profit  of  $14,000. 

An  analysis  of  the  various  accounts,  made  by  their  accountant  showed 

the  following  summarized  statement: — 

RETAIL    DEPARTMENT. 

Total  Sales   $176,000.00 

Less  Cost  of  Merchandise   1 19,000.00 


Gross  Profits  Retail  Department. 


$57,000.00 


MANUFACTURING  DEPARTMENT. 

Total  Sales    $181,000.00 

Less  Cost  of  Material  in  Mdse $64,000.00 

Manufacturing    Labor 63,000.00 

$127,000.00 


II 


Gross  Profits  Manufacturing  Dep't. 


Less  Expenses 


$54,000.00 

$111,00.00 
97,000.00 


$14,000.00 
As  a  basis  of  comparison  with  the  former  year's  results,  the  per- 
centages of  corporation  B  in  respect  to  their  retail  department  and  manu- 
facturing department,  may  be  accepted  as  applying  to  the  whole  of  that 
year's  results  of  the  combined  companies.  These  percentages  were  as 
follows : — 

RETAIL    DEPARTMENT. 

Sales    100.0% 

Cost  of   Merchandise '. 70.5% 

Gross  Profit   '39-5^° 

100.0% 

MANUFACTURING    DEPARTMENT. 

Sales    , 100.0% 

Cost  of  Material  in  Merchandise 30.0% 

"       Manufacturing  Labor  355% 

65.5% 
Gross  Profit  34-5% 

244 


C,  P.  A.  Examination  Questions. 

From    the    above   information    work    out    by   percentages    and    show 
the  causes  affecting  the  reduction  in  profits  from  $30,000  to  $14,000. 

(6)     On   the  31st   of  December,    1905,   the   books   of  the   A   and   B 
Co.  showed  the  following  Trial  Balance  before  making  closing  entries: 

Inventory,  Jan.  ist,  1905 $125,000.00 

Sales    $1,280,658.00 

Cash  on  hand  and  in  Bank 75,120.00 

Petty  Cash  Accoimt 27.00 

Purchases    820,500.00 

Returns    5,31500 

Goods    on    Consignment   with    Euro- 
pean Agents  at  selling  prices $17,000.00 

Freight,   Insurance  and   expenses   on 

same    1,500.00       18,500.00 

Salaries    12,600.00 

Wages 135,418.00 

Rent  and  Taxes 19,820.00 

Factory   Expenses    64,582.00 

Accounts  Receivable  (Subject  to  5%  Discount 

at  one  month)    400,625.00 

Accounts  Payable  (Subject  to  2%  Discount  at 

one  month)    85,200.00 

Bills  Payable  25,000.00 

Furniture  and  Fixtures  26,000.00 

Premiums  paid  on  purchase  of  Lease   (Lease 

acquired   January   ist,    1905,   expires   Dec. 

31st,  1914)    29,500.00 

Miscellaneous    Expenses 27,825.00 

Surplus  as  at  Jan.  ist,  1905 133,920.00 

3,000    Shares    in   the    "O.    K."    Company    (at 

cost)    300,000.00 

Capital  Stock   500,000.00 

Dividends   on   Investments 36,000.00 

$2,060,805.00      $2,060,805.00 

Prepare  Profit  and  Loss  Account  and  Balance  Sheet  after  taking 
into  consideration  the  following  matters  and  making  any  adjustments 
in  the  accounts  which  you  consider  advisable: 

The  inventory  of  merchandise  on  hand  Dec.  31,  1905,  amounts  to 
$117,850.00.  The  amount  of  bills  payable,  $25,000.00,  falls  due  March 
31st,  1906,  and  was  discounted  Oct.  ist,  1905,  $625.00  being  charged  to 
miscellaneous  expense  for  discount  as  at  that  date. 

The  last  dividend  on  the  "O.K."  company  Stock  was  received  in 
May,  1905,  and  was  at  the  rate  of  6%  for  the  year  ending  April  30,  1905. 

245 


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•I 


Accounting  Problems  and  Solutions. 
Theory  of  Accounts. 

Tuesday,  May  8,  1906,  9.30  a.  m.,  to  1.30  p.  m. 

75  credits  necessary  to  pass,  out  of  a  possible  100  credits. 

Each  complete  answer  will  receive  10  credits.  Do  not  repeat  ques- 
tions on  examination  papers  but  write  answers  only,  designating  the 
questions  by  number.  The  intelligence  indicated  by  answers  will  be 
considered  in  marking  the  applicants,  as  well  as  the  technical  accuracy 
of  such  answers. 

(i)  Special  Trustees  are  named  in  a  will  to  administer  ten  separate 
trusts,  the  terms  of  which  are  that  the  beneficiaries  named  in  each 
trust  shall  receive  the  income  on  certain  specific  amounts  on  a  4%  basis. 
The  trustees  after  making  an  appraisal  of  various  securities  left  by  the 
decedent,  turn  over  to  each  trust  certain  securities  which  on  a  4%  basis 
will  make  the  amount  specified  in  the  will.  They  open  one  set  of  books 
to  take  care  of  all  transactions  affecting  the  ten  trusts.  Prepare  the 
opening  entry  or  entries  on  the  Journal,  and  describe  the  best  form 
and  rulings  for  keeping  these  trusts  in  one  set  of  books. 

(2)  Describe  briefly  a  simple   system   of  bookkeeping   for   either: — 

(a)  A  proprietor  or  lessee  of  a  theatre,  who  receives  all  profits  ac- 
cruing from  the  production  of  plays  in  such  theatre  after  paying  to  the 
theatrical  company  a  certain  percentage  of  the  gross  receipts. 

(b)  A  village,  town  or  city  in  respect  to  keeping  accurate  records  of 
special  assessments. 

(3)  Discuss  the  term  "Income  and  Disbursements"  as  used  on  An- 
nual Reports  of  Life  Insurance  companies  furnished  to  various  State 
insurance  departments.  What  do  Non-Ledger  Liabilities  and  Non-Ledg- 
er Assets  include  in  such  reports?  What  dangers,  if  any,  may  be  an- 
ticipated by  a  method  of  bookkeeping  where  certain  liabilities  and  assets 
are  not  carried  on  the  books  of  account? 

(4)  Describe  the  various  methods  which  you  have  met  with  for 
writing  off  the  premium  on  bonds  purchased,  pointing  out  their  weak- 
nesses or  advantages.  What  is  the  most  scientific  method  of  dealing 
with  premiums  paid  and  upon  what  principle  is  it  based? 

(5)  Sketch  forms  of  disbursement  voucher  and  journal  voucher. 
What  method  would  you  use  to  insure  prompt  return  of  vouchers  sent 
out,  and  what  is  your  method  of  filing  all  vouchers  for  ready  reference? 

(6)  Name  the  various  methods  of  distributing  "Factory  Expense" 
or  "Factory  Burden,"  so  as  to  apportion  same  to  the  cost  of  the  article 
or  articles  manufactured,  stating  advantages  of  each  in  various  kinds 
of  business. 

(7)  Explain  how  you  would  install  for  a  large  concern  a  system  of 
book-keeping  arranged  so  that  only  the  proprietor  or  officers  of  the 
company,  together  with  their  auditor  (a  certified  public  accountant), 
shall  be  cognizant  of  its  financial  condition  and  annual  profits  or  losses. 

(8)  A  Land  Company  or  Association  is  incorporated  and  pur- 
chases fifty  acres  of  land  which  it  sub-divides  into  blocks  and  lots.     It 

246 


C.  P.  A.  Examination  Questions. 

then  negotiates  the  sale  of  first  mortgage  bonds  on  the  whole  prop- 
erty, from  the  proceeds  of  which  it  makes  the  streets,  lays  the  sewers 
and  side-walks  and  carries  out  other  improvements,  after  which  it  places 
the  lots  on  the  market  for  sale.  Wherein  do  these  bonds  differ  from 
those  secured  by  a  plant?  Describe  the  journal  entries  you  would  expect 
to  make  on  the  sale  of  one  of  these  lots  sold  on  a  contract.  The  con- 
tract provides  that  when  one-half  of  the  purchase  price  has  been  paid, 
title  will  be  given  to  the  purchaser  subject  to  a  mortgage  for  the  unpaid 
portion.  What  entries  would  you  then  make?  How  would  you  close 
the  books  at  the  close  of  each  fiscal  year? 

(9)  Describe  fully  what  procedure  and  methods  you  would  adopt, 
if  called  upon  to  introduce  and  install  an  entirely  new  system  of  book- 
keeping (not  cost  accounting)  into  the  office  of  a  large  manufacturing 
concern. 

(10)  Draw  up  a  form  of  "Check  Register"  to  be  used  in  conjunction 
with  a  complete  Voucher  System,  it  being  intended  that  the  Check 
Register  shall  take  the  place  of  the  disbursement  side  of  the  Cash  Book 
and  shall  also  record  the  deposits  and  withdrawals  in  three  different  bank 
accounts.  Discounts  on  goods  purchased  to  be  handled  through  the 
Voucher  Journal. 


Commercial   Law. 

Tuesday,  May  8,  1906,  1.30  p.  m.  to  4.30  p.  m. 

75  credits  are  necessary  to  pass,  out  of  a  possible  100  credits. 

Each  complete  answer  will  receive  10  credits.  Do  not  repeat  ques- 
tions on  examination  papers,  but  write  answq-s  only,  designating  the 
questions  by  number.  The  intelligence  indicated  by  answers  will  be  con- 
sidered in  marking  the  applicants,  as  well  as  the  technical  accuracy  of 
such  answers. 

(i)     What   are    the   advantages   of   incorporating   a    business^     For 
what  purposes  may  corporations  be  formed  in  Illinois  ?    Name  exceptions 
if  any.  ' 

(2)  Must  each  share  be  paid  for  in  full  by  each  subscriber  to  an 
Illmois  Corporation  before  a  certificate  of  stock  may  be  issued  to  him? 

May  capital  stock  be  paid  for  in  property? 

(3)  Stock  certificates  issued  to  the  original  subscriber  bearing  the 
printed  words  "Fully  paid  and  non-assessable,"  when  in  fact  it  was 
only  partly  paid  for;  subsequently  it  is  sold  and  assigned  to  a  purchaser 
without  notice  of  the  fact  that  it  is  not  paid  for  in  full.  What  remedy 
has  a  creditor  of  the  corporation  against  the  original  subscriber  and 
against  the  transferee? 

(4)  Has  the  holder  of  a  single  share  of  stock  the  right  to  inspec- 
tion of  the  books?    If  so,  when,  where  and  under  what  circumstances? 

(5)  How  should  an  agent  execute  negotiable  paper  in  order  that 
it  might  be  binding  on  the  principal  and  not  upon  himself? 

247 


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y 


Accounting  Problems  and  Solutions. 

(6)  When  is  an  acceptance  by  mail  or  telegraph  of  an  offer  com- 
plete?   When  can  an  offer  be  withdrawn  without  liability? 

(7)  When  goods  are  ordered  of  a  New  York  Corporation  by  a 
Chicago  business  house,  whose  agent  is  the  carrier?  Who  can  bring 
suit  if  the  goods  are  lost  in  transit? 

(8)  The  date  of  maturity  of  a  note  is  changed  by  the  payee  with 
the  consent  of  the  drawer.  How  does  it  affect  the  surety  on  the  note, 
if  the  alteration  makes  the  note  due  at  an  earlier  date?    At  a  later  date? 

(9)  A  shoemaker  sells  out  his  business  to  a  corporation  and  agrees 
not  to  go  in  business  in  the  State  of  Illinois  for  a  period  of  25  years. 
Ten  years  later  he  establishes  himself  again  in  business  in  Illinois.  Has 
the  corporation  a  right  to  recover  in  an  action  for  damages  for  breach 
of  his  contract? 

(10)  What  is  the  Hability  of  a  bank  in  reference  to  negotiable  paper 
left  with  it  for  collection,  which  it  is  necessary  to  send  to  another  city 
for  collection?  ^___ 

Auditing. 

Wednesday,  May  9,  1906,  9.30  a.  m.  to  12.30  p.  m. 

75  credits  necessary  to  pass  out,  out  of  a  possible  100  credits. 

Each  complete  answer  will  receive  10  credits.  Do  not  repeat  ques- 
tions on  examination  papers,  but  write  answers  only,  designating  the 
questions  by  number.  The  intelligence  indicated  by  answers  will  be  con- 
sidered in  marking  the  applicants,  as  well  as  the  technical  accuracy 
of  such  answers. 

(i)  You  are  called  upon  to  audit  the  books  of  a  "Holding  Com- 
pany," owning  90  per  cent,  of  the  stocks  of  six  large  manufacturing 
companies  scattered  over  the  United  States.  From  the  books  of  the 
"Holding  Company"  you  are  requested  to  prepare  a  Certified  Balance 
Sheet  and  Profit  and  Loss  Account,  it  being  stated  that  it  is  not  to 
be  used  for  publication,  but  will  be  mailed  to  one  of  the  shareholders 
who  appears  to  be  disgruntled.  Balance  Sheets  and  Profit  and  Loss 
Accounts  of  the  subsidiary  companies  signed  by  their  respective  Secre- 
taries, are  produced  for  your  inspection  but  you  are  refused  access  to 
the  actual  books  of  account  of  these  companies.  Explain  fully  what 
your  course  of  action  would  be  in  this  matter  and  your  reasons  therefor. 

(2)  In  an  audit  stipulating  for  the  examination  of  all  vouchers  of 
every  description,  what  would  be  proper  vouchers  for  the  following: 
purchases,  returned  purchases,  sales,  returned  sales,  cash  receipts,  cash 
payments,  journal  entries? 

(3)  You  are  called  upon  to  examine  the  books  of  a  Life  Insur- 
ance Company.  Explain  fully  how  you  will  verify  the  fact  that  all 
securities  carried  on  the  books  of  account  are  duly  accounted  for,  and 
your  method  of  carrying  out  such  verification. 

248 


C.  P.  A.  Examination  Questions. 

(4)  You  are  called  upon  to  audit  the  books  of  account  of  the 
executors  and  trustees  of  an  estate.  The  executors  completed  their 
duties  18  months  after  the  death  of  decedent.  Explain  the  essential 
features  of  an  audit  of  this  character. 

(5)  You  are  called  upon  to  make  a  balance  sheet  audit  of  a  National 
Bank  with  a  Capital  Stock  of  $1,000,000.00  and  deposits  of  $10,000,000.00. 
Explain  fully  how  you  will  verify  the  cash  balances. 

(6)  A  Construction  Company  is  carrying  out  work  on  a  number 
of  contracts.  At  the  close  of  its  fiscal  year,  these  contracts  are  in  all 
stages  of  completion,  from  those  which  are  just  begun  to  those  which 
are  almost  finished.  How  should  you  compute  their  value  as  an  asset 
in  the  Balance  Sheet? 

(7)  What  step  would  you  take  to  satisfy  yourself  that  the  cash 
receipts  of  a  business  for  a  year  are  as  stated  on  the  books? 

(8)  In  determining  the  result  of  the  operations  of  a  company  whose 
business  requires  the  use  of  a  large  number  of  tools  and  implements, 
what   general    rule   would   you    consider? 

(9)  In  presenting  a  balance  sheet,  what  items  are  matters  of  fact  and 
what  items  are  opinions,  and  taken  as  a  whole,  are  you  establishing 
a  fact  or  an  opinion? 

(10)  Can,  or  can  not,  a  going  concern,  employing  a  salaried  manager 
and  superintendents,  charge  any  part  of  their  salaries  to  cost  of  improve- 
ments or  extensions  that  may  be  added  to  the  plant  at  intervals?  In 
either  view,  why? 


249 


If 


If 


Accounting  Problems  and  Solutions. 

Practical  Accounting. 

Pennsylvania  Elxamination,  May  21-23,   1906. 

May  21,  1906,  9  A.  M.  to  5  P.  M. 
1.     A  printing   and   publishing   company   has   the   following   depart- 
ments : — 

(i)  Bindery  and   G)mposing  Room 

(2)  Store 

(3)  Subscription    Sales    Department 

(4)  Periodical   Department 

(5)  General  Office 

The  system  of  accounts  under  which  the  business  is  operated  does 
not  classify  and  arrange  the  various  parts  of  the  business  and  the  ac- 
counts relating  to  each  in  such  a  way  as  to  render  possible  an  easy  grasp 
of  the  general  situation.  The  difference  between  the  assets  and  liabilities 
and  the  final  net  profit  for  the  year  are  shown,  but  the  various  consti- 
tuent elements  entering  into  these  final  results  are  by  no  means  easily 

traced. 

The  personnel  of  the  General  Office  consists  of  general  officers,  book- 
keepers and  clerks.  This  office  is  responsible  for  the  general  conduct 
of  the  business,  and  for  the  maintenance  of  the  buildings.  It  also  handles 
and  conducts  the  selling  end  of  the  business,  negotiates  loans  and  pays 

taxes. 

The  Bindery  Department  is  conducted  as  a  manufacturing  business.  It 
does  work  for  outside  customers,  and  for  the  Store  Department.  It 
purchases  its  own  materials,  other  than  white  paper,  pays  its  own  wages, 
maintains  its  own  equipment,  and  dehvers  its  own  goods. 

The  Store  buys  white  paper  for  the  Bindery,  and  also  buys  books 
from  the  Bindery  and  from  other  publishers.  It  sells  paper  and  books 
to  other  departments,  and  books  to  customers.  It  maintains  a  selling 
and  advertising  organization  and  a  shipping  and  delivery  department. 

The  Subscription  Sales  Department  conducts  a  subscription  sales  busi- 
ness, purchasing  books  from  the  store  and  from  outside  publishers  em- 
ploying a  force  of  salesmen  and  placing  advertising  in  various  periodicals, 
also  sending  out  circulars. 

The  Periodical  Department  publishes  and  sells  two  magazines.  This 
department  receives  subscriptions  and  advertising,  purchases  manu- 
script, maintains  an  editorial  department,  advertises  the  magazines,  and 
defrays  the  cost  of  paper,  printing,  and  binding. 

In  all  departments  there  are  certain  incidental  expenses  which  are 
not  properly  chargeable  to  any  one  department. 

Devise  a  system  of  accounts  for  this  business,  assigning  to  each  de- 
partment the  debits  and  credits  which  can  properly  be  traced  to  it,  carry- 
ing the  result  thus  arrived  at  into  a  general  profit  and  loss  account.  De- 
scribe and  define  the  use  of  each  account. 

Prepare  a  pro-forma  balance  sheet  showing  the  accounts  that  you 
would  carry  for  the  assets  and  liabiHties  of  such  a  business,  also  a  pro- 

250 


C.  P.  A.  Examination  Questions. 

forma  trading  account  for  each  department,  and  a  pro-forma  profit  and 
loss  account.  Show  the  accounts  and  the  arrangement  thereof  omitting 
figures. 

2.    The  Assets  and  Liabilities  of  the  Corry  CodX  G>mpany,  January  i, 
1905,  as  disclosed  in  its  Ledger  at  the  Main  Office,  were  as  follows : — 

ASSETS. 

Accounts   Receivable   $271,500.00 

Cash    16,500.00 

Mine  Account 19,640.00 

Machinery    29,610.00      $337,250.00 

LIABILITIES. 

Accounts  Payable  $147,300.00 

Capital    100,000.00 

Surplus    89,950.00      $337,250.00 

The  Mine  Books  disclosed  assets  January  ist,  1905,  as  follows: — 

Cash    $1,250.00 

Store  Supplies   28,900.00 

Coal   14,800.00 

Wages  paid  but  not  earned  4,300.00       $49,250.00 

During   the    year    1905    the    transactions    of   the    Company   were,    as 
follows : — 

Coal  sold   $297,000.00 

Store  supplies  bought  on  credit 163,000.00 

Store  Supplies  sold  for  Cash 179,000.00 

Store  Supplies  sold  to  Wage  earners  on 

credit   15,105.00 

Wages  earned  during  year  paid  in  cash. . .   116,700.00 

Wages  earned  during  year  not  paid 24,210.00 

Cash  received  on  account  of  Accounts  Re- 
ceivable     434,000.00 

Cash  paid  on  account  of  Accounts  Payable  193,500.00 

The  Mine  Books,  at  the  close  of  the  year  disclosed  Assets,  as  follows : — 

Cash    $10,410.00 

Store  Supplies  48,700.00 

Coal   16,400.00 

$75,510.00 
Less  Wages  due  to  Men 4,805.00       $70,705.00 

These  Assets  amounting  to  $70,705.00  were  carried  in  the  books  of  the 
Main  Office  at  a  valuation  of  $53,410.20. 

251 


B.) 

IV,  I  ill 


■*  \ 


i 


is' 


"M 


Accounting  Problems  and  Solutions. 

Submit  balance  sheet  as  of  Jan.  i,  1906  from  the  Main  Office  Ledger; 
also  statement  giving  the  true  condition  of  each  Ledger  Account  assum- 
ing the  Main  Ledger  Accounts  to  have  been  properly  revised. 

3.  A.  B.  and  C.  form  a  Co-partnership. 

A.  contributes  $275,000.00  and  is  to  receive  25%  of  profits. 

B.  "  $150,000.00    "     "    "  "    12^%  "     " 
C           "           $575,000.00    "     "    "         "    62^%  "     " 

$1,000,000.00 
The  profits  for  the  first  year  amount  to  $300,000.00. 

A.  withdraws  $200,000.00 

B.  **  50,000.00 

C.  "  162,500.00 

Desiring  to  embark  in  a  new  business  A.  purchases  all  but  1-6  of  C's 

interest  in  the  profits  for  the  ensuing  year  for  $370,000,  and  thereafter 
sells  to  B.  all  but  1-3  of  his  interest  i.i  the  future  profits  for  $450,000,  the 
amounts  thus  paid  for  the  interests  sold  being  added  to  the  capital  already 
contributed. 

Upon  the  assumption  that  the  balance  due  to  C.  on  Capital  Account 
increased  by  the  amount  received  by  him  from  A.  equals  1-6  of  the  amount 
of  the  Capital  of  a  new  firm,  what  additional  amounts  must  be  contributed 
by  A.  and  B.  to  warrant  their  pro  rata  of  profit  of  1-3  and  J4  respectively 
and  what  would  have  been  the  condition  of  the  account  of  A.  B.  and  C. 
respectively  if  the  profits  for  the  year  amounted  to  $700,000,  also  what 
would  it  have  been  had  the  interest  of  each  in  the  profits  remained  on 
the  basis  of  their  interest  as  stated  for  the  first  year  to  wit:  25%,  125^% 
and  62j^%  assuming  interest  @  6%  is  allowed  each  on  the  amount  of 
Capital   invested  ? 

4.  The  Maryland  Street  Railway  Company  wiih  an  authorized  Capital 
Stock  of  $1,000,000  consisting  of  5,000  shares  each  of  Preferred  and  Com- 
mon Stock  at  the  par  value  of  $100  had  on  January  ist,  1905,  assets  and 
liabilities  as  follows: — 

ASSETS. 

Real  Estate  and  Building $200,000.00 

Power  Plant,  Machinery,  &c 250,000.00 

Aerial  Construction  200,000.00 

Surface  Construction 200,000.00 

Underground  Construction  150,000.00 

Rolling  Stock   300,000.00 

Accounts  Receivable  10,000.00 

Cash    5,000.00      $1,315,000.00 

UABILITIES. 

Preferred  Stock   $450,000.00 

Common  Stock  400,000.00 

First  Mortgage  Bond  5% 350,000.00 

Accounts  Payable   5,000.00 

Surplus    110,000.00      $1,315,000.00 

252 


C.  p.  A.  Examination  Questions. 

The  Deposit  Electric  Company,  with  an  authorized  Capital  Stock  of 
$500,000  had  on  the  same  day,  assets  and  Habilities  as  follows  :— 

ASSETS. 

Real  Estate $300,000.00 

Power  Plant,  Machinery 150,000.00 

Aerial  Construction  125,000.00 

Underground  Construction  100,000.00 

Sundry  Assets  15,000.00 

Profit  &  Loss  10,000.00        $700,000.00 

LIABILITIES. 

Capital  Stock  - $500,000.00 

Mortgage  6%    100,000.00 

Accounts  Payable 100,000.00         $700,000.00 

The   Maryland   Street  Kailway  Company  purchased   securities  of  the 
Deposit  Electric  Company  in  quantities  and  at  prices  as  follows:— 
$400,000  of  the  Capital  Stock  @  $125  payable  in  Cash. 
$50,000  of  the  Capital  Stock  @  $130  payable  with  $30,000  of  the  pre- 
ferred  stock  of  the    Maryland   Street   Railway   Company  @ 
$150  and  cash  to  balance. 
$100,000  of  the  Bonds  @  $115  payable  in  the  unissued  Common  Stock 
of  the  Maryland  Street  Railway  Company  @  $93  and  cash  to 
balance. 

$10,000  of  the  Cash  payable  for  the  Stock  purchased  to  be  passed  to 
the  credit  of  the  profit  &  loss  of  the  Deposit  Electric  Co.  by 
the  Vendors  to  cancel  the  charge  of  like  amount  to  said  ac- 
count. 

To  provide  funds  to  meet  the  above  obligations  and  also  to  retire  its 
5%  Mortgage  Bonds  @  $105.  the  Maryland  Street  Railway  Company  is- 
sued $1,000,000.  of  4%  Bonds  and  sold  the  entire  amount  there  for  Cash 
at  95%. 

Assuming  that  the  dividend  of  the  Deposit  Electric  Company  declared 
during  the  year  1905  amounted  to  $25,000.  and  the  profit  of  the  Mary- 
land Street  Railway  Company  from  operating,  exclusive  of  interest  on 
its  bonded  debt  amounted  to  $100,000.  to  what  extent  has  the  Profit  & 
Loss  of  the  Maryland  Street  Railway  Company  been  affected,  during 
the  year,  by  reason  of  its  acquisition  of  the  securities  of  the  Deposit 
Electric  Company  and  of  the  redemption  of  its  own  5%  Bonds. 

Show  also  the  condition  of  accounts  of  the  Maryland  Street  Railway 
Company  at  the  end  of  the  year. 

S.  ^  The  Estate  of  John  Smith,  deceased,  consists  of  Securities  etc.^ 
appraised  as  follows: — 

APPRAISED  VALUE. 

$100,000  Wabash  R.  R.  5%  Bonds   $125,000.00 

$200,000  Rio  Grand  Rwy.  Co.  4%  Bonds 230,000.00 

$200,000  Fort  Wayne  R.  R.  5%  Bonds 275,000.00 

253 


h 
iff 


Accounting  Problems  and  Solutions. 

$400,000  Pittsburgh  Traction  Co.  3%  Bonds 400,000.00 

$100,000  Canton  Water  Co.  3}^%  Bonds 100,000.00 

Accounts  Receivable  375,000.00 

Cash    50,000.00 

$1,555.00000 
also  Real  Estate  subject  to  mortgage  liens  of  $100,000  @  5%. 

The  will  provides  for  legacies  amounting  to  $100,000  payable  to  sundry 
parties,  and  directs  that  Securities  be  set  aside  to  pay  out  of  the  Income 
derived  therefrom  an  annuity  of  $10,000  to  the  Widow  to  whom  shall  also 
be  paid  one-third  of  the  net  income  from  the  Real  Estate ;  and  the  Income 
from  Personal  Property  is  made  payable  one- fourth  to  Maggie  Jones, 
one-third  to  Sarah  Peters  and  the  balance  to  James  Smith.  The  residue 
of  the  Estate,  real  and  personal,  is  payable  to  the  said  James  Smith  at 
the  death  of  the  Widow  and  of  Maggie  Jones  and  Sarah  Peters. 

Five  years  from  the  death  of  the  Decedent,  the  Executors  Accounts 
were  as  follows: — 

Securities  set  aside  to  pay  annuity  to  Widow: — 
$200,000  Fort  Wayne  R.  R.  5%  Bonds 

Interest  received  $35,000.00 

Interest  in  Default 15,000.00 

RECEIPTS. 

Accounts   Receivable,   not  appraised  in   Inventory $17,000.00 

Accounts  Receivable  60%  of  value 60,000.00 

Accounts  Receivable  on  account 175,000.00 

Interest  on  Securities 177,500.00 

Rental  of  Real  Estate  127,000.00 

PAYMENTS. 

Repairs,  Taxes,  etc.  on  Real  Estate $22,0000.00 

Betterments  to  Real  Estate  16,000.00 

Decedent's  Debts  75,000.00 

Widow,  (on  account  of  Annuity)    35,000.00 

Widow,  (on  account  of  Real  Estate  Income), 6,000.00 

Maggie  Jones  15,000.00 

Sarah  Peters  18,000.00 

James  Smith  (on  account  of  Personal  property  Income)     20,000.00 

James  Smith  (on  account  of  Real  Estate  Income)  10,000.00 

Executors   (on  account  Commissions  @  5%)   on  Prin- 
cipal Account   25,000.00 

Expenses  of  Administration  3,000.00 

Incumbrances  on  Real  Estate  and  $23,000  Interest 123,000.00 

Prepare  Orphans'  Court  Account  with  distribution  account  attached. 


Theory  of  Accounts. 

May  22,  1906,  2  P.  M.  to  5  P.  M. 

I.    Describe  a  perpetual  inventory,  how  used — its  advantages  and  dis- 
advantages,  if  any. 

254 


C,  p.  A.  Examination  Questions. 

2.    Given  a  plant  employing: 

25  yard  laborers  at  $1.15  per  day. 
70  mechanics  at  $2.50  to  $3.25  per  day. 
40  helpers  in  machine  shop  at  $1.50  per  day. 
30  moulders  at  $2.75  to  $4.00  per  day. 

10  helpers  and  20  laborers  in  foundry  at  $1.50  and  $1.25  per  day. 
25  pattern  makers  at  $3.00  to  $4.00  per  day. 
10  helpers  in  pattern  shop  at  $1.50  per  day. 
20  foremen  and  under  bosses  in  all  three  departments 
Devise  a  time  keeping  system  for  these  various  classes  of  labor  and 
give  your  reasons  in  full  for  the  action  you  take. 

3.  How  would  you  adjust  losses  where  an  inventory  and  full  record 
of  the  busmess  has  not  been  kept?  Describe  the  practical  application  of 
the  co-insurance  clause. 

4.  What  are  the  three  leading  types  of  corporation  consoUdation? 
Discuss  m  detail  the  advantages  and  disadvantages  of  each  form  from 
the  standpoint  of  the  corporation. 

5.  State  fully  the  value  of  accounts  under  the  following  conditions: 

First,— When   correctly   kept. 

Second, — When  incorrectly  kept. 

Third,— As  a  basis  of  liquidation. 

Fourth,— As  a  going  concern. 

Fifth,— For  the  purpose  of  sale  of  business, 
giving  fully  your  views  as  to  both  Capital  and  Revenue  Accounts,  cover- 
ing above  conditions  including  any  change  in  conditions  that  you  may 
suggest.  ' 

6.    What  is  the  basis  of  accounts— 

(a)  In  a  corporation 

(b)  In  a  partnership 

covering  in  your  answer  a  condition  wherein  the  true  basis  may  be  faulty. 
Describe  a  Cost  System  inaugurated  by  yourself,  or  with  which 


7. 


you  are  famihar,  covering  details,  and  give  your  views  as  to  its  correct- 
ness or  otherwise,  and  its  bearing  upon  the  general  books. 

8.  State  the  difference,  if  any,  between  Department  Store  accounts 
and   other    Mercantile   businesses. 

What  is  the  aim  of  Department  Store  accounting? 

9.  What  is  the  effect  on  a  business  of  the  following  accounts : 

Sinking   Fund. 

Depreciation. 

Reserve  for  Depreciation. 

10.  Give  the  names  and  purposes  of  the  general  books  of  a  trust 
company  doing  a  banking  business,  together  with  such  auxiliary  books 
generally  used  and  any  suggestions  as  to  improvement  or  addition  thereto. 

255 


ftt 


Accounting  Problems  and  Solutions. 

Auditing. 

May  22,  1906,  9  A.  M.  to  i  P.  M. 

1.  In  making  an  audit  of  the  accounts  of  French  and  Allen,  stock 
brokers,  how  would  you  verify, — 

(a)  The  stocks  and  bonds  owned  or  held  as  collateral  for  cus- 
tomers* accounts?    In  your  reply  state  clearly  each  step  in  the  process. 

(b)  The  stocks  and  registered  bonds  in  process  of  transfer? 

(c)  In  preparing  their  Balance  Sheet  how  would  you  determine 
the  customers'  accounts  as  to  whether  they  should  be  classed  as  good, 

doubtful,  or  bad? 

Write  a  report  from  one  hundred  to  two  hundred  words  upon  such  an 

examination. 

2.  Describe  in  detail  your  method  of  conducting  an  audit  of,  (a)  a 
manufacturing  corporation,  (b)  a  commission  house. 

3.  What  means  should  an  auditor  adopt  to  ascertain  that  all  remit- 
tances made  by  regular  customers  and  receipts  from  cash  sales  have  been 
properly  entered  on  the  Cash  Book? 

4.  In  the  case  of  an  audit  of  the  books  of  a  corporation  where  the 
volume  of  transactions  is  so  large  that  a  detailed  checking  of  all  post- 
ings and  footings  is  out  of  the  question,  what  course  should  be  pursued  in 
the  examination  in  order  to  insure  the  correctness  of  the  balance  sheet? 

5.  The  machinery  used  by  a  firm  has  been  purchased  on  the  instalment 
plan  with  monthly  payments,  and  under  the  stipulation  that  the  title  shall 
pass  only  when  the  last  payment  has  been  made.  At  the  close  of  the 
fiscal  year  there  are  yet  several  payments  to  be  made.  The  firm  also 
pays  a  royalty  on  the  output  of  some  of  the  machines  secured  on  this 
plan.  How  should  the  auditor  in  his  annual  statement  deal  with  the 
machinery,  the  instalments  paid  and  the  royalty? 

6.  If  in  examining  a  manufacturing  corporation  using  a  Cost  Sys- 
tem in  their  shops,  you  find  a  large  difference  between  the  general  books 
and  the  cost  in  the  Cost  Books,  in  what  accounts  would  you  probably  be 
able  to  trace  the   difference? 

7.  What  constitutes  a  thorough  examination  of  a  Bank? 
Write  a  report  covering  such  an  examination. 

8.  Is  there  any  difference  between  a  thorough  audit  and  an  exam- 
ination?   If  so,  state  fully  wherein  they  differ. 

9.  Write  a  report  of  your  audit  of  a  corporation  in  which  the  yearly 
results  of  your  examination  show  a  marked  difference  from  previous  years. 

10.  Give  a  statement  as  to  the  duties  of  an  auditor  in  relation  to 
the  bookkeeper  and  to  his  clienLs,  and  if  auditing  a  corporation,  as  to  the 
stockholders  of  the  corporation,  covering  confidences,  and  personal  contact. 

256 


C.  P.  A.  Examination  Questions, 
Commercial  Law. 

May  23,  1906,  9  A.  M.  to  i  P.  M. 

I.  Wynne  wants  to  become  a  special  partner  under  the  Pennsylvania 
Act  of  1836.  What  precautions  must  he  observe  to  obtain  the  protection 
of  that  act?  What  is  the  difference  between  the  Act  of  1836  and  the 
Partnership  Association  Act  of  1874? 

2.  Is  the  following  note  negotiable  or  assignable:  "We  promise  to 
pay  to  Peter  Burns  $60.00  one  month  after  demand,  and  empower  any  at- 
torney to  appear  for  and  confess  judgn.ent  against  us  for  this  amount, 
with  5%  commissions  for  collections.  We  waive  the  benefit  of  all  ex- 
emption laws  and  give  Peter  Burns  the  option  of  demanding  one  share  of 
Penna.  R.  R.  Stock  instead  of  $60.00  as  aforesaid.  In  witness  whereof, 
we  hereunto  set  our  hands  and  seals. 

(Signed)   F.  X.  Williams,  J.  P.  Horton." 

3.  How  are  the  directors  and  the  president  of  a  Penn'a  Corporation, 
which  was  formed  under  the  General  Corporation  Act  of  1874,  chosen? 
What  is  meant  by  stock  proxy?  What  is  meant  by  the  authorized  capital? 
Need  anything  be  paid  into  the  treasury  of  the  company  before  it  starts? 
If  the  company  fails,  to  what  extent  are  stockholders  liable  for  its  unpaid 
debts  ? 

4.  Give  a  definition  of  "  Agency." 

State  in  what  manner  authority  may  be  conferred. 

5.  State  some  of  the  powers,  duties,  and  liabilities  of  the  officers  and 
employees  of  a  bank,  including  the  Board  of  Directors. 

6.  (a)  What  are  the  powers  in  general  of  a  Building  &  Loan  As- 
sociation ? 

(b)   What  are  the  rights  of  a  withdrawing  stockholder? 

7.  How  is  a  corporation  created?  Give  some  of  the  powers,  rights 
and  duties,  and  the  general  rule  as  to  rights  of  members. 

8.  Give  Intestate  Law  of  this  state. 

9.  What  is  a  Beneficial  Society,  and  wherein  does  it  differ  from  an 
Insurance  Company? 

10.  What  action  would  you  take  if  called  upon  to  open  the  books  of 
the  Smith  &  Jones  Company,  which  has  been  organized  under  the  laws 
of  Pennsylvania  with  an  authorized  capital  of  $50,000.  The  minute  book 
shows  that  the  preliminary  requirements  have  all  been  met  The  minute 
book  also  shows  that  the  corporation  has  taken  over  the  going  business  of 
William  Jones,  one  of  the  incorporators,  receiving  all  the  assets  and  as- 
suming all  the  liabilities,  issuing  in  full  payment  thereof  full  paid  non- 
assessable capital  stock  of  the  Smith  &  Jones  Company  in  the  sum  of 
$49,000. 

Show  fully  the  several  steps  you  would  take  and  the  reason  therefor. 


257 


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Accounting  Problems  and  Solutions. 
.    Theory  of  Accounts. 

(New  York  Examination,  June,   1906.) 

Answer  lo  questions  but  no  more.  Answers  in  excess  of  the  number 
required  mil  not  be  considered.  Do  not  repeat  questions  but  write  an- 
swers  only  designating  by  number  as  in  question  paper.  Check  (  /) 
the  number  of  each  one  of  the  questions  you  have  answered.  Each  com- 
plete answer  will  receive  lo  credits.  Papers  entitled  to  75  or  more  credits 
will  be  accepted.    June  19,  1906— 9.15  a.  m.  to  12.15  P-  m.,  only. 

1  How  should  money  received  on  account  of  stock  subscriptions  and 
forfeited  by  nonpayment  of  instalments  as  they  mature,  be  treated  on  the 
books  of  the  corporation? 

2  A  is  indebted  to  B  on  open  account  to  the  limit  of  his  credit.  He 
needs  further  accommodation  to  the  extent  of  $2,500  and  gives  as  security 
a  draft  at  three  months  on  C  for  $5,000,  which  is  $1,000  more  than  he 
owes.  To  adjust  this  difference  C  draws  at  four  months  on  A  for  $1,000. 
Assimiing  that  the  drafts  are  accepted  by  the  respective  parties,  state 
what  should  be  the  proper  entries  on  the  books  of  A.  Show  books  of 
original  entry  and  ledger. 

3  State  as  concisely  as  possible  a  proper  system  of  factory  cost 
accounts. 

4  Mention  the  methods  of  bookkeeping  in  general  use.  What  books 
are  ordinarily  kept  in  each  case?  How  is  the  profit  or  loss  ascertained 
by  the  different  systems? 

5  Explain  the  difference  between  a  trading  account  and  a  profit  and 
loss  account. 

6  Devise  a  system  of  accounts  for  an  executor.  What  accounts 
should  he  necessarily  keep? 

7  To  what  uses  should  a  journal  be  put? 

S  Distinguish  between  Revenue  &  Expenditure  Account  and  Receipts 
&  Disbursements  Account.     State  fully  the  difference. 

9  You  are  asked  to  test  the  correctness  of  a  set  of  books  kept  by 
single  entry  by  applying  the  double  entry  system  to  the  entries  made. 
What  would  you  do,  without  writing  a  new  set  of  books?  Take  as  a 
basis  the   following  ledger  accounts: 

Dr.  John  Doe  Cr. 

1905                                                    1905 
Jan.    2  Balance    $1,000  Feb.    2  Cash    $600 

"  20  Mdse 500         "       Discount  12 

"       Returns    400 

Dr.  Richard  Roe  Cr. 

190S  1905 

Jan.  25  Freight   charges $200  Jan.  20  Mdse $2,000 

Feb.    2  Acceptance    a, 500 

**       Mdse   returned 300 

258 


C.  P.  A.  Examination  Questions. 

10  List  the  principal  books  of  account  of  a  mercantile  concern  with 
which  you  are  acquainted  and  describe  briefly  the  use  of  each. 

11  Describe  a  system  of  accounts  suitable  for  a  firm  of  contractors 
that  does  work  on  contract  for  a  fixed  sum  and  also  on  cost  and  per- 
centage. 

12  A  grain  dealer  charges  his  customers  15  cts.  apiece  for  sacks  that 
cost  him  10  cts.  He  agrees  to  receive  back  any  sacks  returned  in 
good  condition  at  12  cts.  each,  calculating  that  they  would  be  worth 
7j4  cts.  each.  How  should  these  transactions  be  treated  on  the  dealer's 
books  ? 

13  Distinguish  between  sinking  fund  and  depreciation  fund.  Show 
the  reason  for  the  creation  of  each  fund  and  state  how  each  is  placed  on 
the  books  of  a  company. 

14  A  and  B  are  friends.  A  needs  funds.  B  knows  C  who  may  be  in- 
duced to  accommodate  A  under  certain  conditions.  For  an  introduction 
by  B  to  C,  A  pays  $100.  C  discounts  for  A  a  note  for  $10,000  due  in 
6  months  and  turns  over  to  him  $9,000.  Frame  journal  entries  covering 
these  transactions.  Show  how  these  transactions  should  appear  in  a 
cash  book. 

15  A  railway  company  sells  on  October  i,  1900,  an  issue  of  5%  20 
year  bonds  dated  September  i,  1900,  at  no  cts.  flat.  How  should  the 
premium  received  be  treated  on  the  books  of  the  company? 

Practical  Accounting. 

Answer  questions  i  and  2  and  two  of  the  others  but  no  more.  Answers 
in  excess  of  the  number  required  will  not  be  considered.  Do  not  repeat 
questions  but  write  answers  only,  designating  by  number  as  in  question 
paper.  Check  (</)  the  number  of  each  one  of  the  questions  you  have  an- 
swered. Each  complete  answer  will  receive  25  credits.  Papers  entitled 
to  75  or  more  credits  mil  be  accepted.  June  19,  1906— 1. 15  to  5.15  p.  m. 
only. 

I  A  owns  a  business  that  he  wishes  to  enlarge  and  arranges  with  B 
to  turn  it  into  a  corporation.  It  is  mutually  agreed  that  all  customers' 
accounts  shall  be  kept  out  of  the  deal  but  the  new  company  is  to  under- 
take to  collect  them  for  A.  A's  indebtedness  is  to  be  paid  out  of  this 
collection,  or,  if  it  prove  insufficient,  A  must  make  good  the  deficiency. 
For  the  purpose  of  this  sale  the  merchandise  on  hand  is  valued  at  $25,000, 
the  store  building  at  $15,000  and  the  goodwill  at  $5,000.  A  is  to  receive 
in  settlement  cash  $5,000  and  the  capital  stock  for  the  remainder. 
B  is  to  invest  a  sum  equal  to  that  of  A.  The  statement  of  A  at  the  date 
of  transfer  shows: 

Assets  Liabilities 

Real  estate  $12,000  Accounts  payable  $5,000 

Merchandise  30,000  Capital    45^000 

Accounts  receivable  6,000  * 

^'^    ^>00Q  $50,000 

$50,000 

259 


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Accounting  Problems  and  Solutions. 

At  the  end  of  6  months  an  accounting  is  had  between  the  corporation 
and  A.  Of  the  outstanding  accounts  $4,500  has  been  collected  and  applied 
toward  liquidating  the  indebtedness.  It  is  then  agreed  that  the  company 
shall  take  over  the  remaining  uncollected  accounts  and  assume  the  re- 
maining liability  on  account  of  creditors  of  A. 

Close  the  books  of  A  in  accordance  with  agreement  of  sale  and  sub- 
sequent arrangement.  Open  the  books  of  the  corporation.  Show  the 
entries  in  the  books  of  the  company  as  to  its  transactions  for  account  of 
A  at  the  time  of  forming  the  corporation. 

2  The  following  is  the  trial  balance  of  the  Arlington  Manufacturing 
Company  at  the  close  of  business  December  31,  1904,  the  end  of  the 
second  fiscal  year  of  the  company's  operations: 

Cash    $25,324 

Land    100,000 

Buildings    200,000 

Machinery    300,000 

Tools  and  implements  40430 

Horses,  wagons  and  harness  30,000 

Office   furniture    5,201 

Bills  receivable  25,812 

Accounts   receivable    163,374 

Investments    20,000 

Salesmen's  accounts,  advances  on  salaries 1,960 

Organization  exp.  $15,000— less  2% 14,700 

Goodwill   200,000 

Bills  payable   $42,000 

Accounts  payable 98,511 

Special  accounts — officers  &  clerks 15,363 

JReserve  for  bad  debts — less  accounts  written  off 112 

**         "depreciation — buildings  2^%    5,000 

*•  '*  "  machinery  6%    18,000 

**         "  "  horses,  wagons,  etc.  10%       3,000 

Capital  stock  10,000  shares  @  $100 1,000,000 

Sales  less  returns  and  allowances 1,240,600 

Rent  of  part  of  business  premises 500 

Inventory  Dec.  31,   1903 104,621 

Purchases  including  furniture  &  cartage 395,662 

Labor — factory  payrolls  600,400 

Salaries  of  officers,  clerical  force 75,i20 

Salaries  of  salesmen   60,440 

Advertising   50,300 

Taxes  4,020 

Insurance 2,600 

Interest  &   Discount    6,500 

Expenses,  stable,  office,  legal  &  unclassified 29,750 


C.  P.  A.  Examination  Questions. 

Maintenance — repairs,  buildings,  machinery,  horses 

&  wagons  26,942 

Profit  &  loss  1903  surplus  60,070 

jjoTE.  $2,483,156      $2,483,156 

Inventory  Dec.  31,  1904 _     $270,560 

Factory  pay   rolls  accrued  but  not  paid    5,750 

Unexpired  insurance   Q12 

From  the  foregoing  trial  balance  and  notations,  prepare  a  Trading  Ac- 
count and  a  Profit  &  Loss  Account,  writing  off  2%  of  organization  expense. 
After  stating  the  net  profits  for  the  current  year,  make  the  same  reserves 
for  depreciation  as  were  made  at  the  end  of  the  first  or  preceding  year. 
Show  as  a  final  balance  at  credit  of  Profit  &  Loss  the  surplus  available 
for  dividends.    Also  prepare  a  balance  sheet  as  at  December  31,  1904. 

3  and  4.  C,  D  and  E  are  partners  sharing  profits  in  accordance  with 
capital  investments.  At  the  end  of  the  fiscal  year,  after  all  nominal  ac- 
counts are  closed,  the  books  show  the  following: 

C^^^    $20,051 

P^^"^    ^ 60422 

Inventory  of  merchandise  41,300 

Bills  receivable  18,028 

Book  accounts  reeivable  70,402 

C  drawings   ,....  8,400 

^  " 6,000 

E  "  4,800 

Bills  payable ^5  211 

C   capital    100,000 

D        " 

^  50,000 

'^  50,000 

Profit  &  Loss,  undivided  profits 24,192 

$229,403      $229,403 

The  partners  thereupon  incorporate  a  company  with  an  authorized  capi- 
tal of  $250,000.  The  company  so  formed  purchase  the  partnership  assets 
and  goodwill,  not  including  the  cash,  for  $250,000.  payable  $200,000  in 
stock  and  $50,000  in  cash,  the  last-mentioned  cash  being  the  proceeds  of 
sale  of  stock  to  F. 

It  is  the  intention  to  divide  the  purchase  money  stock  among  the  ven- 
dors in  proportion  to  their  former  capital  and  to  adjust  their  accounts  by 
the  division  of  the  cash  shown  in  trial  balance,  which  will  then  be  placed 
to  their  credit  as  loans  to  the  company  at  6%  interest  and  remain  as  work- 
ing capital.  The  bills  payable  are  to  be  settled  by  the  partners.  As  the 
drawings  of  the  partners  are  not  in  proportion  to  their  respective  shares 
m  the  profits,  the  partners  are  charged  with  the  interest  thereon  in  the 
following  amounts,  viz. :  C  $231,  D  $165  and  E  $132. 

261 


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Accounting  Problems  and  Solutions. 

Frame  the  necessary  entries  to  close  the  partnership  books  and  show 
the  amount  of  cash  received  by  each  partner. 

Referring  to  question  i,  frame  the  necessary  entries  to  open  the  books 
of  the  company  and  prepare  a  balance  sheet  showing  the  condition  of 
the  company  at  the  beginning  of  its  operation. 

5  December  i,  1905,  a  New  York  merchant  ships  goods  of  the  value 
of  $5,000  on  consignment  to  a  commission  merchant  at  Rio  de  Janeiro, 
insuring  them  in  the  Atlantic  Mutual  against  loss  or  damage  in  transit 
and  prepaying  freight  and  insurance  amounting  to  $250.  On  arrival  the 
goods  are  found  to  be  in  a  partially  damaged  condition  and  the  loss  is 
adjusted  at  $1,000,  the  certificate  for  which  the  consignee  transmits  to 
the  consignor  together  with  an  account  sales  for  $3,000  dated  March  i, 
1906,  and  a  final  account  sales  for  $2,000  dated  April  i,  1906.  A  draft  on 
New  York  for  $4,300  accompanied  this  final  account,  being  the  balance 
due  after  deducting  duty  paid  and  commission  earned. 

Give  expression  to  these  transactions  on  the  books  of  the  consignor. 

6  Blackman  &  Co.  of  New  York  agree  with  Whittaker  &  Co.  to 
ship  on  joint  account  a  car  load  of  goods  on  consignment  to  Seattle.  The 
invoice  price  of  the  goods  is  $4,000  less  5%.  Blackman  &  Co.  pay  the 
hauling,  insurance  and  freight  charges  amounting  to  $200  and  give  to 
Whittaker  &  Co.,  March  I,  1905,  a  sight  draft  on  the  consignees  for 
$2,000  as  part  payment  for  the  goods.  On  May  i,  1905,  Blackman  &  Co. 
receive  an  account  sales  from  the  consignees  and  their  check  for  $6,000 
as  the  net  proceeds  of  the  consignment.  They  then  pay  Whittaker  &  Co. 
the  balance  due  them.    Interest  is  calculated  at  6%. 

Prepare  joint  consignment  account  and  the  account  to  be  rendered 
by  Blackman  &  Co.  to  Whittaker  &  Co. 


Commercial  Law. 

Answer  10  questions  but  no  more.  Answers  in  excess  of  the  num- 
her  required  zvill  not  be  considered.  Do  not  repeat  questions  but  write 
answers  only,  designating  by  number  as  in  question  paper.  Check  (V) 
the  number  of  each  one  of  the  questions  you  have  answered.  Each  com- 
plete answer  will  receive  10  credits.  Papers  entitled  to  75  or  more  credits 
will  be  accepted.    June  20,  1906— 1. 15  to  4.15  p.  m.  only. 

1  What  is  an  executory  contract?  What  is  an  executed  contract? 
May  a  contract  be  executed  on  one  side  and  executory  on  the  other  ?  Ex- 
plain. 

2  Is  a  note  or  a  check  invalidated  if  (i)  dated  on  a  legal  holiday,  (2) 
dated  on  Sunday?    Explain  fully. 

3  Define  agency.  What  classes  of  agents  are  there?  How  should 
authority  be  conferred  on  an  agent?  Has  an  agent  power  to  delegate  his 
authority? 

4  How  may  agency,  duly  created,  terminate? 

262 


C.  P.  A.  Examination  Questions. 

5  What  redress  has  a  principal  in  case  his  agent  pledges  (i)  the 
goods  of  the  principal,   (2)   negotiable  paper  of  the  principal? 

6  What  is  a  warranty?  What  is  the  rule  as  to  damages  for  breach 
of  warranty? 

7  When  does  a  deed  conveying  realty  take  effect?  What  is  the  legal 
presumption  in  the  case  ?    What  is  meant  by  placing  a  deed  in  escrow  ? 

8  What  are  the  elements  that  constitute  a  warranty  deed? 

9  What  is  a  fixture,  in  the  legal  acceptation  of  the  term,  in  each  of 
the  following  cases:  (i)  as  between  buyer  and  seller,  (2)  as  between 
landlord  and  tenant? 

10  What  is  an  accommodation  note  and  what  are  the  rights  and  the 
obligations  of  parties  thereto? 

What  formalities  attend  the  entering  into  a  contract  on  the  part  of  a 
corporation?     How  does  a  corporation  execute  a  contract? 

12  What  is  the  rule  for  calculating  interest  on  a  note  on  which  par- 
tial payments  have  been  made  from  time  to  time? 

13  What  is  the  statute  of  limitations  and  on  what  policy  is  it  founded  ? 
When  would  the  statute  begin  to  run  against  the  holder  of  a  demand  note 
and  why?  How  long  would  it  run?  What  would  be  the  effect  of  a  par- 
tial payment  on  the  note  at  any  time  during  the  running  of  the  statute? 

14  What  is  meant  by  stoppage  in  transit?  Explain  the  proceedings 
necessary  for  such  stoppage  and  the  circumstances  under  which  they  mav 
be  exercised. 

15  What  is  meant  by  arbitration  and  award?  Give  the  general  rules 
governing  the  proceedings.  Under  what  circumstances  is  the  remedy 
usually  resorted  to? 


Auditing. 

Answer  10  questions  but  no  more.  Answers  in  excess  of  the  number 
required  will  not  he  considered.  Do  not  repeat  questions  hut  write  an- 
swers only,  designating  by  number  as  in  question  paper.  Check  ( /) 
the  number  of  each  one  of  the  questions  you  have  answered.  Each  com- 
plete answer  will  receive  10  credits.  Papers  entitled  to  75  or  more  credits 
will  he  accepted.    June  20,  1906.— 9.15  a.  m.  to  12.15  P-  m.,  only. 

1  In  making  an  audit  of  the  accounts  of  a  corporation  for  the  first 
year  of  its  existence  what  method  of  procedure  would  you  pursue  and 
what  records  would  you  want  to  examine  in  addition  to  the  books  of 
account  ? 

2  A  mercantile  concern  carries  among  its  assets  a  number  of  accept- 
ances, some  of  which  are  past  due.  How  should  an  auditor  proceed 
to  ascertain  the  correctness  of  the  account? 

3  An  employee  holding  the  dual  position  of  cashier  and  bookkeeper 
is  suspected  of  dishonesty.    Some  one  has  established  the  agreement  be- 

263 


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Accounting  Problems  and  Solutions. 

tween  his  cash  book  and  bank  pass  book.    What  should  an  auditor  do  if 
subsequently  called  in  to  ascertain  the  facts? 

4  In  going  over  the  affairs  of  a  banking  institution  with  branches, 
state  how  the  following  items  should  be  verified:  (i)  cash  at  home  of- 
fice and  branches,  (2)  loans  secured  and  unsecured,  (3)  securities  owned. 
What,  if  anything,  should  be  done  concerning  individual  deposits  accounts  ? 

5  A  construction  company  has  at  the  close  of  its  fiscal  period  a  num- 
ber of  uncompleted  contracts  in  various  stages  of  progress.  How  should 
they  be  carried  into  the  balance  sheet?  Mention  two  other  ways  in  which 
they  might  appear  in  the  balance  sheet. 

6  A  company  is  organized  with  a  capital  of  $50,000.  The  stock  is  is- 
sued for  a  "  going  concern  "  whose  accounts  showed  it  to  have  a  net  worth 
of  $45,000.  Nothing  was  said  about  goodwill  when  the  contracts  were 
made  between  the  owners  and  the  new  company.  How  would  you  treat 
the  $5,000  difference? 

7  Would  you  regard  checks,  drawn  payable  to  order  and  cashed  by 
the  bank,  as  sufficient  vouchers  for  the  payments  of  a  mercantile  concern? 
Give  a  reason  for  your  answer. 

8  Is  an  auditor  justified  in  certifying  to  a  balance  sheet  in  case  the 
books  of  account  are  not  in  balance?     Give  reasons. 

9  In  the  books  of  an  insurance  company  are  found  numerous  entries 
relating  to  the  purchase  and  sale  of  stocks  and  bonds.  What  proof  should 
the  auditor  require  as  to  the  correctness  of  these  accounts? 

10  What  is  a  bank  pass  book  ?  How  far  should  one  rely  on  the  entries 
contained  therein? 

11  Give  in  substance  the  rules  lately  laid  down  by  the  State  Banking 
Department  regarding  accrued  interest  as  related  to  statements  filed  with 
the  department  by  banks. 

12  In  auditing  the  accounts  of  a  fiduciary,  chargeable  with  income 
arising  from  rents,  interest,  securities  and  cash  in  bank,  how  should  the 
auditor  satisfy  himself  that  a  full  return  was  shown  by  the  books  sub- 
mitted ? 

13  The  statement  submitted  by  the  treasurer  of  a  corporation  shows 
receipts  of  money  greatly  in  excess  of  disbursements,  leaving  a  balance 
in  hand  of  more  than  enough  to  pay  to  stockholders  a  dividend  of  6%. 
The  directors  declare  such  dividend  pursuant  to  the  statement  submitted 
without  asking  for  any  other  or  further  information.  Was  the  act  of  the 
directors  a  prudent  one  under  the  circumstances?  Give  reasons  for  your 
answer. 

14  Describe  your  node  of  procedure  in  connection  with  some  audit  on 
which  you  have  been  engaged.  Relate  the  nature  of  the  business,  answer- 
ing in  sufficient  detail  to  enable  the  examiners  to  form  an  opinion  regard- 
ing your  knowledge. 

J64 


C.  p.  A.  Examination  Questions, 

15  How  would  you  proceed  to  ascertain  the  net  sales,  purchases,  ex- 
penses and  net  profits  of  a  business  for  a  given  period  when  the  ledgers, 
sales  books,  purchase  books  and  supporting  documents  have  been  destroyed 
by  fire,  and  the  only  records  available  are  the  cash  book,  bank  pass  book 
and  book  of  monthly  balances,  the  latter  containing  all  the  ledger  balances 
and  annual  balance  sheets?  [It  is  to  be  understood  that  no  unusual  trans- 
actions had  taken  place.] 


:^5 


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I 


Accounting  Problems  and  Solutions. 

Practical  Accounting. 

(Michigan  Examination,  July,   1906.) 

Friday,  July  27,  1906,  from  1 130  p.  m.  to  6  '.30  p.  m. 

75  credits  necessary  to  pass,  out  of  a  possible  100  credits. 

Each  complete  answer  will  receive  16  2-3  credits.  Do  not  repeat  ques- 
tions on  examination  papers  hut  zvrite  answers  only,  designating  the  ques- 
tions  by  number.  The  intelligence  indicated  by  answers  will  be  considered 
in  marking  the  applicants,  as  well  as  the  technical  accuracy  of  such  an- 
swers. 

I.  A  corporation  is  organized  under  the  laws  of  the  State  of  Michi- 
gan, with  Capital  Stock  $250,000.00,  of  which  $100,000.00  is  preferred  and 
$150,000.00  is  common  stock,  shares  $100.00  each.  The  purchasers  of  pre- 
ferred stock  at  par  are  to  receive  an  equal  amount  of  common  stock  free, 
all  the  preferred  stock  is  subscribed  and  paid  for,  leaving  $50,000.00  of 
common  stock  imsubscribed.  It  I3  found  that  the  remaining  common 
stock  cannot  be  sold  for  sufficient  cash  for  requirements  and  the 
holders  of  preferred  stock  donate  to  the  Treasury  $50,000.00  of  their  com- 
mon stock.  The  common  stock  is  sold  at  50c  on  the  dollar.  Provide 
journal  entries  covering  the  above. 


2.    A  gas  company  shows 
its  first  year  of  business : 

Manufacturing    Labor...     .$ 

Boiler  Fuel  

Generator  Fuel   

Oil    

Purifiers    

Repairs  Works   

Expense  Works   

Water    

Insurance    

Taxes    

Distribution  Labor  and  Ma- 
terial     

Office   Expense    

Stable  Expense   

Repairs  Mains  

Repairs  Meters   

Repairs  Services  

Street  Lighting  

Advertising    

Maintenance  Arc  Lainps   . . 

Licenses    

Discounts    

General   Expenses    


the  following  trial  balance  at  the  end  of 


5,400.00 

3,200.00 

5,400.00 

126,000.00 

3,200.00 

2,600.00 

3,900.00 

1,500.00 

300.00 

4,800.00 

12,000.00 

13,500.00 

4,000.00 

1,800.00 

600.00 

700.00 

300.00 

300.00 

1,500.00 

1,000.00 

34,000.00 

5,000.00 

266 


Capital   Stock $  500,000.00 

Bonds  500,000.00 

Accounts  Payable.  48,000.00 

Gas  Accounts 342,600.00 


C.  P.  A.  Examination  Questions. 

Sundry  Debtors  Gas  40,000.00 

Sundry  Debtors   Mdse 10,000.00 

Cash    29,000.00 

Bond  Interest  25,000.00 

Plant    1,055,600.00 

$1,390,600.00  $1,390,600.00 

The  inventory  of  Manufacturing  Material  is  $20,000.00 

The   inventory   of   Distribution    Material   is    4,000.00 

No  other  inventories  of  any  description  are  carried. 

The  amount  of  gas  manufactured  during  the  year  was  300,000,000  cubic 
feet.  Amount  sold,  270,000,000  cubic  feet.  Unaccounted  for,  30,000,000 
cubic  feet. 

Give:  ist.  The  Manufacturing  Cost  of  Gas  sold.  2d.  The  Distribu- 
tion Cost  of  Gas  Sold.  3ci.  Prepare  Statement  of  Operations  of  the 
Company  and  Balance  Sheet  of  Assets  and  Liabilities. 

3.  Following  is  a  list  of  the  accounts  appearing  on  the  Tvial  Bal- 
ance of  a  manufacturing  company  which  deals  in  finished  merchandise 
purchased  as  well  as  its  own  products.  From  this  list,  and  without 
using  figures,  draw  up  plans  of  Financial  Statements  (Balance  Sheet, 
Manufacturing  Account,  Profit  and  Loss  Account,  etc.)  in  the  form 
which  you  think  most  suitable: 

Accounts  Payable. 

Salaries,  Management. 

Capital  Stock. 

Bills  Receivable. 

Cash. 

Salaries,  Office  and  Store. 

Real  Estate. 

Fuel. 

Insurance  (Plant.) 

Light. 

Freight  (on  Mdse.  purchased.) 

Machinery  and  Tools. 

Buildings. 

Sales  (own  product.) 

Inventory,  own  products. 

Inventory,  Raw  Materials. 

Inventory,  partly  Manufactured  Goods. 

Inventory,  Merchandise  purchased. 

Sales    (Merchandise  purchased.) 

Inventory,  Repair  Supplies. 

Undivided  Profits   (end  of  last  year.) 

Purchases    (  Merchandise. ) 

Rent,  Factory. 

267 


it  " 


* 


ll 


Accounting  Problems  and  Solutions. 

Rent,  Store  and  Office. 

Printing  and  Stationery. 

Accounts  Receivable. 

Advertising. 

Purchases  (Raw  Materials.) 

Machinery  Repairs. 

Productive  Labor  (Factory.) 

Labor  (Warehouse.) 

Office  Furniture. 

Reserve  for  Bad  and  Doubtful  Accounts. 

Reserve  for  Depreciation. 

Insurance  (Merchandise.) 

Bad  and  Doubtful  Acounts. 

Travellers*   Expenses   and    Salaries. 

Management  Salary,  Factory. 

Management  Salary,  Office. 

Discounts  allowed. 

Interest  Payable. 

Depreciation. 

Sundry  Factory  Expenses. 

Postage. 

Subscription  and  Donations. 

Discounts  Received. 

Rents   (Receivable.) 

Insurance  unexpired,  Plant. 

Insurance  unexpired,  Merchandise. 

4.  A  manufacturer  is  desirous  of  securing  a  partner  and  furnishes 
a  statement  covering  five  years'  operations  as  follows: 

Assets. 

2">^^i"gs    $20,000.00 

Machinery  and  Fixtures  75,000.00 

Inventory  Mdse.  and  Supplies   5000000 

Cash    1\.  ' 

.  ' 5.000.CX) 

Accounts   Receivable 40.000.00 

LIABILITIES. 

Accounts  and  Bills  Payable  $30,00000 

Sales  average  per  year  *////;/.  soo'ooo.oo 

Wages  paid  per  year  170,000.00 

Expense,  Selling  and  General,  per  year  35,000.00 

Material   Purchased    260,000.00 

Buildings  are  on  leased  ground,  lease  expires  in  ten  years,  annual 
land  rental  $1,000.00.    Buildings  revert  to  owner  at  expiration  of  lease. 

New  machinery  when  installed  ten  years  ago  cost  $50,000.00.  Addi- 
tions since  cost  $25,000.00;  no  depreciation  has  been  charged  off.  All  re- 
pairs and  replacements  charged  to  expense. 

What,  in  your  opinion,  would  be  a  fair  price  to  be  contributed  for  a 
half  interest?    Explain  fully. 

268 


C.  p.  A.  Examination  Questions. 

5.  A.  and  B.  each  carrying  on  a  similar  business  agree  to  form  a 
partnership,  the  new  firm  to  take  over  the  assets  and  assume  the  lia- 
bilities of  each.  The  following  trial  balance  representing  the  book  ac- 
counts was  presented: 

— A— 

Capital    5  40,000.00 

Machinery  and  Fixtures  $30,000.00 

Cash    2,000.00 

Bills  Receivable  5,000.00 

Accounts   Receivable    30,000.00 

Inventory  Merchandise   25,000.00 

Wages    7,000.00 

Wages  due    250.00 

Expense    10,000.00 

Bills  Payable   10,000.00 

Merchandise  Account   40,000.00 

Accounts  Payable   20,000.00 

Repairs    1,250.00 

$1 10,250.00      $1 10,250.00 


— B— 

Capital    

Machinery  and  Fixtures  $30,000.00 

Cash    4,000.00 

Bills   Receivable   8,000.00 

Accounts   Receivable    40,000.00 

Wages    9,000.00 

Wages   due    

General  Expense   15,000.00 

Bills   Payable    

Merchandise  Account    

Inventory    32,000.00 

Repair  Account   2,500.00 

Accounts  Payable   


$  50,000.00 


500.00 

15,000.00 
50,000.00 


25,000.00 


$140,500.00      $140,500.00 


Each  partner  is  to  draw  half  the  profits.  Formulate  opening  entries 
for  the  new  firm.  At  the  end  of  the  year  a  profit  is  made  of  $30,000.00. 
Create  a  Trial  Balance  and  Inventory,  using  your  own  figures  to  pro- 
duce that  result ;  divide  the  profit  between  the  partners  and  make  State- 
ment of  Assets  and  Liabilities. 

6.  A  corporation  organizes  under  the  Law  of  Michigan  to  conduct 
a  manufacturing  business.  Authorized  Capital  $400,000.00,  half  each 
common   and   preferred    stock,   shares   $100.00.    Five   incorporators   sub- 

269 


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Accounting  Problems  and  Solutions. 

scribe  each  for  ten  shares  of  common  stock  at  face  value.  John  Smith 
purchases  from  three  manufacturing  companies,  their  complete  plants 
for  $395,000.00  and  transfers  said  plants  to  the  Incorporated  Company 
for  the  remaining  $395,000.00  of  common  and  preferred  stock  and 
$150,000.00  of  First  Mortgage  5%  bonds  out  of  a  total  issue  of  bonds  of 
$200,00.00,  leaving  $50,000.00  of  bonds  in  the  treasury. 

Make  opening  Journal  entries  and  Trial  Balance  showing  the  Com- 
pany's condition  after  the  transactions. 

THEORY  OF  ACCOUNTS. 
Saturday,  July  28,  1906,  from  8:30  a.  m.  to  12:00  noon. 
75  credits  necessary  to  pass,  out  of  a  possible  100  credits. 
Each   complete  answer  will  receive   10  credits.    Do  not  repeat  ques- 
tions on  examination  papers  but  write  answers  only,  designating  the  ques- 
tions by  number.    The  intelligence  indicated  by  answers  will  be  considered 
in   marking   the  applicants,   as  well  as   the   technical  accuracy   of  such 
answers. 

1.  Define  bookkeeping.     State  various  kinds  with  explanations. 

2.  What   books  are   necessary  for   recording  the  transactions  of  an 
Incorporated   Company?     State   the  use  of  each   book  mentioned. 

3.  Define  the  following:    (a)    Fixed  assets  and  fixed  liabilities.    (&) 
Current  assets  and  current  liabilities. 

4.  Define   "Merchandise   Account"   and   state   how   in  your   opinion 
it  should  be  kept. 

5.  What  is  the  purpose  of  the  following  accounts  and  how  are  they 
created  on  the  books:  (a)  Sinking  Funds?  {b)  Reserve  Funds?  (c)  De- 
preciation?    (d)  Good  will? 

6.  Name  the  various  forms  of  Capital  Stock,  with  full  explanations. 

7.  How  would  you  ascertain  the  profits  of  a  firm,  whose  books  are 
kept  by  single  entry? 

a  What  is  "dividend?"  State  when  and  how  dividends  become  ef- 
fective. State  how  the  declaration  and  payment  of  dividends  are  usually 
recorded  in  books  of  account. 

9.  State  the  use  of  a  Private  Lock  Ledger  and  its  relation  to  the 
General  Ledger. 

10.  (o)  What  constitutes  Manufacturing  Cost?  (6)  What  consti- 
tutes Selling  Cost?  (c)  What  relation  do  cumulative  preferred  stock 
dividends  bear  to  the  cost  of  operating. 

AUDITING. 
Saturday,  July  28,  1906,  from  i  :3o  p.  m.  to  5 :30  p.  m. 
75  credits  necessary  to  pass,  out  of  a  possible  100  credits. 
Each  complete  answer  will  receive  10  credits.    Do  not  repeat  ques- 
tions  on   examination    papers  but  write  answers  only,  designating  the  ques- 
tions by  number.    The  intelligence  indicated  by  answers  will  be  considered 
in  marking  the  applicants,  as  well  as  the  technical  acuracy  of  such  answers. 

1.  What  is   the  general  course  for  an  accountant  to  follow  when 
called  upon  to  audit  the  books  of  any  business? 

2.  How  far  should  an  auditor  inquire  into  the  work  of  his  prede- 
cessor ? 

270 


C.  P.  A.  Examination  Questions. 

3.  What  books  or  records  of  a  partnership  or  corporation  should  be 
examined  by  an  auditor? 

4.  What  are  the  most  important  things  an  auditor  has  to  certify  in 
a  balance  sheet  showing  Loss  and  Gain  and  the  financial  condition  of  a 
business  ? 

5.  Mention  the  methods  of  manipulating  accounts  which  are  most 
commonly  resorted  to  for  the  purpose  of  concealing  fraud  and  em- 
bezzlement. 

6.  How  would  you  classify  the  accounts  in  preparing  a  statement 
of  the  following: 

(a)   Gas  and  Electric  Light  Company? 

{b)  Electric  Railroad? 

(c)  A  Manufacturing  Business? 

7.  What  accounts  would  be  affected  by  depreciation  on  leased  prop- 
erties ? 

8.  Should  depreciation  be  written  off  the  accounts  of  a  corporation 
whose  property  is  of  a  wasting  nature,  such  as  a  quarry  or  a  mine  ?  Give 
reasons. 

9.  When  books  show  large  additions  to  buildings  and  machinery  con- 
sisting of  portions  of  payrolls  and  materials  used,  without  items  of 
detail,  what  means  should  be  taken  to  prove  or  disprove  the  accuracy 
of  the  charges? 

10.  State  briefly  the  work  done  by  you  in  connection  with  some 
audit  in  which  you  have  been  engaged. 

COMMERCIAL  LAW. 
Friday,  July  27,  1906,  from  8:30  a.  m.  to  12:00  noon. 
75  credits  necessary  to  pass,  out  of  a  possible  100  credits. 
Each  complete  answer  will  receive  10  credits.     Do  not  repeat  ques- 
tions on  examination  papers  but  write  answers  only,  designating  the  ques- 
tions by  number.    The  intelligence  indicated  by  answers  will  be  considered 
in  marking  the  applicants,  as  well  as  the  technical  accuracy  of  such  answers. 

1.  What  is  a  contract?  (a)  Can  a  contract  ever  be  implied?  (6)  Can 
a  valid  verbal  contract  be  made  where  the  consideration,  if  any,  is  merely 
one  promise  for  another? 

2.  What  is  the  effect  of  an  endorsement,  "without  recourse,"  on  a 
promissory  note?  (a)  Is  the  endorser  of  a  promissory  note  relieved  from 
liability  where  the  holder  has  failed  to  notify  him  of  the  time  it  became 
due  and  the  default  of  payment  by  the  maker? 

3.  What  is  a  corporation?  (o)  How  does  it  differ  from  a  partner- 
ship?    (&)   How  does  it  differ  from  a  joint  stock  company? 

4.  What  is  the  meaning  of  the  word  "Stock"  in  the  reference  to 
a  corporation?  (a)  What  does  it  represent?  (6)  How  is  it  transferred? 
(c)  What  right  have  stockholders  in  and  to  the  corporate  property? 

5.  What  is  a  receiver?  (a)  What  is  his  first  duty  on  taking  possession 
of  property  or  trust  funds  committed  to  his  care? 

6.  What  is  a  trustee  in  bankruptcy?  (a)  How  appointed  and  what 
are  his  duties? 

7.  How  much  must  a  debtor  owe  to  enable  his  creditors  to  force  him 
into  bankruptcy?  (a)  Is  it  necessary  that  he  shall  have  committed  an 
act  of  bankruptcy?  (6)  State  briefly  what  is  meant  by  acts  of  bankruptcy, 
(c)  What  is  meant  by  a  composition  with  creditors,  and  the  effect  thereof? 

8.  What  are  some  of  the  principal  features  of  the  statute  of  frauds  ? 

9.  What  is  your  understanding  of  the  statute  of  limitations? 

10.  A  general  agent  of  a  corporation,  for  the  accommodation  of  a 
personal  friend  endorsed  his  friend's  note,  as  general  agent  of  the  corpora- 
tion, before  it  was  endorsed  by  the  payee.  Is  the  corporation  liable  for 
the  payment  of  the  note?    (o)  Give  reason. 

271 


\m     'I 


■  J  Wli 


II 


Accounting  Problems  and  Solutions. 

Practical  Accounting. 

(New  York  Examination.  Tuesday,  January  29,  1907) 

Ansiver  questions  i  and  2  and  two  of  the  others  but  no  more.  Answers 
in  excess  of  the  number  required  will  not  be  considered.  Each  complete 
answer  will  receive  25  credits.    Papers  entitled  to  75  or  more  credits  will 

be  accepted. 

I.  The  books  of  Robert  West,  real  estate  agent,  for  the  year  1906, 
disclose  the  following  opening  and  closing  balances  and  intervening 
volume  of  transactions. 


Titles   of   Accounts 


Balances  Dec.  30, 1Q05 


Cash 

Tenants 

Rents  accrued. . . . 

Owners 

Clients 

Trade  creditors 

Fees 

Commissions 

Discounts 

Expenses 

Personal  drawings. 

Office  furniture 

Capital 


$0,760.08 
1,060 


260 


$1,060 
a, 500 
5.020 


Transactions  in  1006 


$137,797.62 

34,656 

34.788 

34,610 

100,034 

4,841.40 


$135,803-70 

34,788 

34,656 

34.788 

102,070 

5,007.40 

125 

3,118.02 
180 


500 


1,647.08 


$11,580.08  $11,580.08 


1,000 
2,000 


$350,627.02  $350,627.02 


Balances  Dec.  31,  1006 


$11,664 
028 


104 


1,000 

^,000 

500 


$  028 

2,678 

6,009 

610 

125 

3,118.92 

180 


1,647.08 


$16,106    $16,106.00 


An  analysis  of  the  books  afforded  further  information  as  follows: 

Tenants  were  allowed  $71  for  repairs  made  by  them,  which  sum  was 
applied  on  account  of  rent  and  charged  to  owners. 

Owners  were  charged  for  commissions  on  collections  $869.70,  trade 
creditors'  bills  for  repairs  $3,566  and  insurance  $52. 

Qients  were  charged,  insurance  $668,  coal  $906,  fees  $120,  commis- 
sions on  sales  $1,004. 

Trade  creditors  presented  bills  for  office  supplies  $50,  insurance  writ- 
ten $576,  coal  $815.40;  they  were  allowed  $180  for  discount  on  settle- 
ments made. 

Commissions  on  sales,  collections,  insurance  written,  and  coal  orders 
were  closed  into  the  general  commission  account,  and  Supplies  Account 
was  transferred  to  Expense. 

The  cash  transactions  were  as  follows:  Receipts— tenants,  $34,717. 
clients  $102^070,  commission  on  sales  $1,010.62  Payments— owners 
$30,051.30,  clients  $98,231.  trade  creditors  $4,661.40,  personal  drawings 
$2,000,   Expense  $950. 

Prepare  an  Articulation  Statement,  showing  in  each  account  the 
several  elements  of  debit  and  credit  and  giving  each  element  the  title  of 
the  Articulating  account  where  in  the  contra  credit  or  charge  appears. 

2.  A,  B,  C  and  D  enter  into  partnership  with  a  capital  of  $100,000. 
A  invests  $40,000,  B  $30,000  C  $20,000  and  D  $10,000.  They  are  to  shaje 
profits  or  losses  in  the  following  proportions:  A  35  per  cent.,  B  28  per 
cent.  C  22  per  cent  and  D  15  per  cent.  They  are  also  to  receive  stipu- 
lated salaries  chargeable  to  the  business. 

272 


C.  p.  A.  Examination  Questions. 

At  the  end  of  six  months  there  is  a  loss  of  $8,000  and  meantime  the 
partners  have  drawn  against  prospective  profits  as  follows:  A  $400,  B 
$600,  C  $600  and  B  $400. 

They  dissolve  partnership  and  agree  to  distribute  proceeds  of  firm 
assets  monthly  as  realized.  C  and  D  enter  other  business  and  A  and  B 
remain  to  wind  up  the  firm's  affairs,  it  being  stipulated  that  from  all 
moneys  collected  and  paid  over  to  C  and  D  a  commission  of  5  per  cent. 
is  to  be  deducted  and  divided  equally  between  A  and  B  for  their  services 
in  the   winding  up. 

The  realization  and  liquidation  lasts  four  months  and  the  transactions 
are  as  follows: 


ist  month. 
2d  month. 
3d  month. 
4th  month 


Assets 
realized 


$30,190 

50.300 
20,010 

9.500 


$110,000 


Liabilities 
liquidated 


$7,900 
6,100 
3,800 
2,200 


$20,000 


Expenses 
and  losses  on 

realization 
exclusive  of 
commissions 


$400 

750 
340 
no 


$1,600 


Prepare  partners'  accounts  showing  the  amount  payable  monthly  to 
each  one. 

3.     On  June  30  Ward  &  Parker,  merchants,  announce  their  inability  to 
meet  their  obligations  and  make  an  assignment  for  the  benefit  of  creditors. 
From  an  examination  of  their  books,  supplemented  by  other  informa- 
tion, their  condition  appears  to  be  as  follows : 

Liabilities 

Creditors,  unsecured $31,250 

**  partly  secured 29,875 

"  fully  secured 21,250 

Taxes  and  wages  of  employes  (preferential) 875 

Assets 

Cash  on  hand 6,875 

Chattels 17,500 

Bills  receivable 5.312 

Warehouse  receipts  and  other  securities 35,000 

Sundry  debtors 3.250 

Losses 

Profit  and  loss  account,  sundry  losses 16,875 

Trade  expenses,  current  period 9.250 

Personal 

Ward,  Capital  account,  Cr 12,500 

personal  drawings,  Dr 11,250 

Parker,  capital  account,  Cr 20,062 

personal  drawings,  Dr 10,500 

Accounts  receivable  show 3,250 

Bad  accounts 1,250 

Doubtful  accounts 750 

Expected  to  produce 250 

The  securities  are  in  the  hands  of  creditors  pledged  to  secure  payment 
of  their  accounts,  viz:. 

273 


I 

'III 

IP' 


S3. 750 

31.250 
11,250 


Accounting  Problems  and  Solutions. 

In  hands  of  partly  secured  creditors 

In  hands  of  fully  secured  creditors.  

Ihe  chattels  are  expected  to  realize.         

l^repare  a  statement  of  affairs  and  a  deficiency  account '  *  " 

half  oreferrpH  cfnit-     -ru  V'?T'?^',  "^  ,  J?*  ^^'^^  ^s  common  stock  and 

in  oavSent  of  th.  «;  ^f  *°^^^  '^^^^  ^"^  ^'"^'"^^  "^^^  issued  to  the  vendor, 
m  payment  of  the  several  properties  acquired  through  him 

with\'  bonus' of  ^nf^H"^  ^'"^^'"^  "^  P^^^^^^^^  sfockt"- bankers  at  par 

Trefer^ed  stock  and  h    'It    n    J'''"'"°"   '.'°'^   ^°"  ^^^^  *^«  shares  of 
prererrea  stock,  and  he  also  sells  $400,000  of  common  stock  at  qo  oer  rent 

The  properties  are  found  to  be  in  a  "run  down"  condition    t^nrl  fhs. 

KTe  Sto  f  si?  ^'/  ^^'-^  ^^^^  f?^'^^'  inTnewals  tTrepatst 
f?n  n  r?!?r       /.u  ^^'^  °^  efficiency,  all  of  which  is  charged  to  revenue 
On  a  review  of  the  accounts  it  appears  that  only  $iqooo  of  said  nntl^v 

r?a"'fo"nots- '"'  ^^"^^^^  '^^^^^°"'  ^"^  *^^  -^"^"^  of'thraKemem 


A. 
B. 
C. 
D. 


II 


HI 


Total, 


$25,000 

75,000 

2,000 

8,000 


$60,000 

100,000 

5,000 

18,000 


$110,000  1     $183,000 


$85,000 

175,000 

7,000 

25,000 


$292,000 


,     Frame  the  journal  entries  necessary  to  open  the  books  of  the  mmnati^ 
m  accordance  with  the  above  statement.  company 

;-.  ^K  "^Ije  composition  of  the  values  of  the  books  of  the  three  old 
Ig^i^l^gj^yjh^ggw  company  as  stated  in  question  Vw'rl?'^ 


compan- 


Assets 


Property  sold i       jg^ 

Book  accounts,  not  sold. . . . ." .' .' .' ' 


II 


000 


1,000 


$163,000 
3.000 


III 


$81,000        $166,000 


Liabilities 
Bills  and  accounts  settled  by  old 

company..      ,       ^^^^^^^ 

Undivided  profits |       *^^',,° 

Capital  stock 


2,000 
30,000 


$100,000 

6,000 

60,000 


$81,000        $166,000 


$282,000 
S.ooo 

$287,000 


$i8q,ooo 

8,000 

90,000 


$287,000 


274 


$3,112 

14,900 
22,750 


8,351 

28,900 

20,000 


C.  p.  A.  Examination  Questions. 

Frame  the  journal  entries  for  closing  the  books  of  the  old  companies 
according  to  the  above  stated  values. 

6.  The  following  is  the  trial  balance  of  Bailey  &  Co.  as  taken  from 
their  ledger  December  30,  1905. 

Cash    

Bills    receivable    

Accounts  receivable  

Bills  payable    

Accounts  payable   

Loans  at  6  per  cent 

Warehouse  receipts  

Merchandise    inventory    

Store   property    

Mortgage  on  store  property  at  5  per  cent 

Unimproved  real  estate  

Store  fixtures    

Depreciation  on  store  fixtures  ( 1904) 

Horses  and  wagons  

Capital  stock,  750  shares  at  $100 

Profit  and   loss,   surplus 

Purchases    

Sales    

Discounts    

Rents,  hall  over  store 

Taxes    

Interest    

Heat  and  light 

Salesmen  and  wages  of  employees 

Officers'  salaries   

Miscellaneous  expenses  and  losses 


6,000 
5,000 

2.  "00 


132,251 


156 

800 

375 
4,912 

4,000 
2,985 


$2,006 
9,121 
5,000 


10,000 


500 

75,000 
2,573 

152,439 
103 
250 


$256,992        $256,992 

Merchandise  inventory  Dec.  30,  1905,  $30,254. 

Prepare  a  trading  and  profit  and  loss  account  for  the  fiscal  year  1905 
and  a  balance  sheet  as  at  the  close  thereof.  Reserve  i  per  cent,  of  the  open 
accounts  receivable  to  cover  bad  debts,  a  further  10  per  cent,  from  office 
furniture  and  20  per  cent,  from  horses  and  wagons  to  cover  depreciation. 

AUDITING. 

Wednesday,  January  30,  1907— 9.15  a.  m.  to  12.15  p.  m.,  only. 

Answer  10  questions  but  no  more.  Papers  entitled  to  75  or  more 
credits  will  be  accepted. 

1  What  meaning  attaches  to  the  term  "auditing,"  other  than  the  re- 
view and  verification  of  accounts  of  past  transactions? 

2  Outline  in  brief  your  ideas  concerning  the  duties  and  responsibilities 
of  an  auditor  of  accounts. 

3  What  do  you  consider  the  best  method  to  employ  in  the  review  and 
audit  of  cash  receipts  and  payments? 

4  What  method  would  you  recommend  in  the  conduct  of  a  cash  ac- 
count to  facilitate  a  speedy  and  thorough  audit  thereof? 

5  Give  a  broad  definition  of  vouchers  as  a  means  of  verifying  items 
entered  in  books  of  account. 

6  On  undertaking  the  audit  of  the  accounts  of  a  company  in  what 
condition  would  you  expect  to  have  the  books,  documents  and  records 
when  submitted  to  you  ? 

275 


h 


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;|i 


4 


I 


Accounting  Problems  and  Solutions, 

7  State  the  general  principles  governing  the  discrimination  between 
what  constitutes  proper  charges  against  Capital  and  what  constitutes 
proper  charges  against  Revenue. 

8  If  the  cash  on  hand  at  the  date  of  a  balance  sheet  had  not  been 
verihed  at  that  time,  how  should  the  auditor  satisfy  himself  as  to  its 
correctness  before  signing  the  certificate? 

9.  To  what  detail  should  an  auditor  first  direct  his  attention  in  be- 
ginning a  general  review  and  audit  of  the  books  of  a  concern  emnloyin- 
nim  for  the  first  time?  ' 

ID    What  means  should  an  auditor  employ  to  determine  the  correctness; 
ot  reserves  for  depreciation  and  discounts,  inventories  of  raw  material 
goods  in  process    finished  wares  and  factory  pay  rolls?     To  what  extent 
IS  he  responsible  for  the  accuracy  of  these  items  as  stated  in  his  report? 

11  Is  there  any  reason  why  the  goodwill  carried  as  an  asset  on  the 
Dooks  ot  a  prosperous  and  growing  manufacturing  concern  should  be 
depreciated  amortized  or  otherwise  written  off,  and  if  so  what  would  bo 
the  ettect  of  such  depreciation,  amortization  or  writing  off? 

12  What  means  should  be  employed  to  verify  the  values  of  open  book 
accounts  receivable,  bills  receivable,  unimproved  real  estate  and  investment 
securities  r 

u     ^^1    l^  }^^^^  ^^  -^}y^  advice  concerning  the  proper  rates  per  cent,  to 
be  adopted  in  providing  for  the  accounts  for  depreciation  on  buildings 
machinery,  tools,  etc.,  what  would  you  recommend  ? 

14  When  a  corporation  acquires  a  number  of  separate  plants,  paying 
a  lump  sum  for  each  is  it  necessary  for  it  to  show  on  the  books  the 
proportion  of  the  purchase  price  paid  for  goodwill,  and  if  so,  what  would 
be  the  proper  method  of  ascertaining  and  expressing  such  proportion  in 
the  accounts? 

15  If  a  company,  duly  organized,  acquires  several  plants  that  are 
found  to  be  in  a  run  down  "  condition  and  to  require  extensive  outlay  for 
repairs  and  renewals  to  bring  them  to  the  required  state  of  efficiency, 
should  such  outlay  be  charged  against  Capital  or  against  Revenue?  Give 
reasons. 

THEORY  OF  ACCOUNTS. 

TuESD.w,  January  29,  1907—9.15  a.  m.  to  12.15  P.  m.,  only 

Answer  10  questions  but  no  more.    Papers  entitled  to  75  or  more  credits 
will  be  accepted. 

1  Describe  the  following  books  and  explain  the  nature  and  the  objects 
01  each : 

(i)   Summary  journal 
(2)   Consumption  journal 

2  Explain  the  difference  in  meaning  between  the  terms  "balance 
sheet      and      statement  of  assets  and  liabilities." 

3  Show  the  manner  in  which  controlling  accounts  are  employed  in 
commercial  and  municipal  bookkeeping. 

4  Describe  the  nature  and  the  purpose  of  each  of  the  following  at  the 
closing  of  a  fiscal  period:  s    i      v. 

(i)  Adjustment  entries 
(2)  Closing  entries 

5  Describe  a  way  of  keeping  a  bills  receivable  book  as  a  book  of 
original  entry  from  which  only  the  credits  to  personal  accounts  are  posted 
in  detail  while  only  the  total  of  monthly  charges  and  liquidations  of  notes 
are  posted  to  the  bills  receivable  account. 

6  When  preparing  a  Trading  and  Profit  and  Loss  Account  at  the 
end  of  a  fiscal  year,  in  what  manner  would  you  treat  the  following 
subjects?  ** 

276 


C.  P.  A.  Examination  Questions. 

( 1 )  Surplus  or  deficit  brought  forward  from  prior  year 

(2)  Reserves  for  depreciation 

(3)  Reserves  for  bad  debts 

(4)  Interest  on  bonds 

(5)  Dividends  on  stock 

(6)  Surplus  or  deficit  carried  forward  to  succeeding  year 

7  In  the  preparation  of  a  balance  sheet  for  a  manufacturing  company, 
what  general  plan  would  you  follow  in  determining  the  order  of  sequence 
in  which  the  assets  and  liabiHties  should  be  stated? 

8  When  preparing  a  balance  sheet  of  an  industrial  company,  in  what 
manner  would  you  treat  the  following  items? 

(i)  Outlay  on  uncompleted  contracts 

(2)  Estimated  profits  on  uncompleted  contracts 

(3)  Bonded   debt  and   sinking   fund   accumulations   to   amortize 

same 

9  What  general  rule  should  govern  the  order  in  which  the  accounts 
should  be  arranged  where  only  one  ledger  is  operated  in  a  small  business? 

10  Does  any  advantage  attach  to  the  employment  of  more  than  one 
volume  for  the  ledger  of  a  business  requiring  only  one  bookkeeper?  Give 
reasons. 

11  Describe  a  condition  in  which  the  use  of  a  few  books  would  not 
result  in  simplicity  of  system  while  the  number  of  books  currently  operated 
could  be  increased  with  advantage. 

12  Rule  a  cashbook  to  provide  for  controlling  accounts  of  debtors  and 
creditors,  also  for  discounts  in  settlement  of  both  receivable  and  payable 
accounts. 

13  Prepare  a  ruling  for  an  invoice  book  to  provide  for  total  monthly 
charges  to  three  material  accounts  and  two  expense  accounts,  and  also  to 
detail  postings  to  sundry  accounts  of  capital  and  revenue  outlay. 

14  Prepare  a  ruling  for  a  sales  book  to  provide  (i)  total  monthly 
postings  to  three  goods  accounts,  (2)  the  separation  of  cash  sales  from 
charge  sales,  (3)  supplementary  distribution  of  sales  among  four 
salesmen's  columns. 

15  Prepare  a  form  of  monthly  summary  journal  entries  for  the  three 
foregoing  books  of  original  entry. 

COMMERCIAL  LAW. 

Wednesday,  January  30,  1907— 1. 15  to  4.15  p.  m.,  only 

Answer  10  questions  but  no  more.  Papers  entitled  to  75  or  more 
credits  will  be  accepted. 

1  Distinguish  clearly  between  public  corporations  and  private 
corporations. 

2  An  interest  in  property  is  known  as  an  estate;  of  what  may  the 
estate  consist? 

3  Estates  are  in  their  legal  character  of  two  kinds,  real  and  personal ; 
define  each. 

4  What  is  a  deed?  What  statements  should  necessarily  appear  in  a 
warranty  deed  of  land? 

5  What  is  a  contract?  Who  may  legally  make  a  contract?  Mention 
four  essentials  of  an  enforceable  contract. 

6  What  is  the  statute  of  frauds?  What  contracts  must  be  in  writine 
in  order  to  be  effective? 

7  What  laws  govern  the  validity  and  construction  of  contracts? 

8  What  is  a  contract  of  guaranty?  How  does  it  differ  from  a  contract 
of  suretyship? 

277 


I 


K 


k*  1 


r 


Hi 
11 


n 


I  ■III 


'  I 


I  ' 


1 


Accounting  Problems  and  Solutions. 

9  What  is  meant  by  the  rule,  "Hearsay  evidence  is  excluded?" 
Illustrate.  State  the  rules  as  to  admission  of  books  of  account  as  evidence 
in  court. 

10  What  matters  should  be  specified  in  articles  of  copartnership? 
How  are  firm  assets  applied  when  there  are  both  individual  creditors  and 
creditors  of  the  firm? 

11  What  is  meant  in  law  by  the  term  "fixtures?"  Does  the  rule  of 
law  differ  when  the  question  is  between  (i)  seller  and  buyer  of  real  estate, 
(2)  landlord  and  tenant?    Explain  fully. 

12  What  is  a  release?  What  is  a  mutual  release?  Can  a  mutual 
release  given  on  adjustment  of  old  accounts  be  disturbed?    Explain. 

13  How  is  a  pledge  of  stock  usually  made?  Must  the  pledgee  return 
to  the  pledgor  the  identical  certificate  pledged?  Has  the  pledgee  the 
right  to  sell  or  to  repledge  the  stock? 

14  What  is  meant  by  ultra  vires  as  to  an  act  of  a  corporation? 
Explain,  and  give  an  example  of  such  an  act. 

15  Define  usury  and  state  the  penalties  for  it.  Mention  the  principal 
exemptions  from  the  operation  of  the  usury  laws. 


Representative  Elxamination  Qyesbons  of  the 

Florida  State  Board  of  Accountancy,   1907,  with  Comments. 

AUDITING. 
(2)     What  do  you  consider  the  proper  way  to  handle  cash  in  ac- 
counts ? 

What  advantages  are  there,  if  any,  in  banking  each  day  the  exact 
receipts  of  the  previous  day? 

How  would  you  verify  the  correctness  of  a  cash  book,  and  ensure 
the  entry  of  all  cash  received? 

(8)  Give  at  least  two  (2)  examples  of  contingent  liabilities,  and 
state  how  they  should  be  treated  in  the  books,  and  on  the  balance  sheet. 

(10)  A  new  company  sells  some  of  its  stock  at  a  premium.  State 
how  these  premiums  should  appear  in  the  accounts. 

(12)  What  duties  and  responsibilities  has  an  auditor  in  connection 
with  inventories  of  goods  on  hand? 

(13)  A  firm  has  been  doing  business  for  ten  years  during  which  time 
no  audit  has  been  made,  and  nothing  has  been  charged  off  on  account  of 
f>ad  debts.    There  are  six  hundred  (600)  accounts  on  the  ledger. 

State  how  you  would  verify  and  classify  them. 

PRACTICAL  ACCOUNTING. 
(2)  A  land  company  owns  a  number  of  city  lots,  the  price  of  each 
of  which  is   fixed  by   schedule,   and   offers   them  for   sale  under  three 
distinct  plans: 

(a)  A  cash  payment  of  25  per  cent,  of  the  price,  and  75  per  cent,  in 
five  years,  mortgage  at  8  per  cent,  interest  payable  half-yearly. 

(b)  A  cash  payment  of  10  per  cent,  of  the  price  in  exchange  for  which 
a  bond  for  title  is  given,  providing  that  the  purchaser  shall  make 

278 


C.  P.  A.  Examination  Questions. 

monthly   payments,    that   unpaid   balances    shall    be    subject    to 
interest  at  8  per  cent,  per  annum  payable  half-yearly,  and  that 
title  shall  be  given  when  purchase  price  and  interest  are  paid. 
(c)  To  the  purchase  price  is  added  an  amount  calculated  to  represent 
the  interest,  the  sum  of  these  is  then  divided  by  120,  and  bond 
for  title  is  given  providing  for  payment  of  the  sum  in  120  equal 
payments;  on  these  being  made  deed  is  to  be  executed. 
Outline  the  entries  for  each  transaction,  especially  those  relating  to 
the  interest. 

(3)  A,  B,  C,  are  partners:  A  is  to  receive  a  salary  of  $2,000 per  annum ; 
B,  $2,500;  and  C  $3,000.  The  balance  of  profits  after  payments  of 
salaries  is  to  be  divided  as  to  the  first  $20,000,  %  to  A,  and  %  each  to 
B  and  C;  and  profits  above  $20,000  are  to  be  divided  equally  among  the 
three.  A  retires  from  active  business,  and  gives  up  his  right  to  salary 
for  1906.  The  profits  for  that  year,  before  charging  salaries,  amount  to 
$35>ooo.  To  what  extent  are  A,  B,  and  C,  respectively  effected  by  A's 
concession  ? 

(6)  On  I  St  of  July,  1905,  a  company  borrowed  $100,000  at  4  per  cent, 
per  annum,  payable  half-yearly,  and  payment  of  loan  to  be  made  at  the 
end  of  ten  years  (10  yrs.)  at  105  per  cent.  It  was  decided  to  set  aside 
annually  out  of  the  profits  such  a  sum  as  would  with  interest  at  4  per 
cent,  per  annum,  provide  for  the  payment  of  the  premium  on  the  loan  at 
the  end  of  the  term. 

(12)  A  client  tells  you  that  he  is  thinking  of  purchasing  a  going  busi- 
ness which  the  owner  tells  him  has  earned  $50,000  in  two  years ;  there  is : 

Real    Estate    said    to    be    worth $30,000.00 

Machinery   and    Equipment    20,000.00 

Stock  on  hand 15,000.00 

Book  Debts 10,000.00 

The  business  has  been  established  for  20  years,  and  $90,000  is  asked 
for  the  concern  (including  the  above  assets).  You  are  desired  to  make 
an  examination  for  your  client,  who  will  act  on  your  representation. 

(14)  The  following  is  the  trial  balance  of  a  land  development  com- 
pany which  has  been  in  business  for  a  year: 

Assets  Liabilities 

Real  Estate $108,000.00      Capital  Stock $75,000.00 

Mortgages 96,000.00  ' 

Bills  Receivable 30,000.00 

Stock  Subscription 12,000.00 

Balance    due    on    Real 

Estate  sold  on  time. .  42,000.00 

Mortgage  Interest  re- 
ceived         5,000.00 

Expenses 6,000.00 

Salaries 8,000.00 

Preliminary  Expenses. .  16,000.00 

Taxes  paid  on  Mort- 
gaged Real  Estate..  .        1,200.00 

Sundry  Debtors 8,000.00 

Surveying  &  Engineer- 

ing. 4,800.00 

Cash  in  Bank 14,000.00 

279 


Authorized  ($300,000) 

Bills  Payable 20,000.00 

Sundry  Creditors 15,000.00 

Mortgages  Payable 18,000.00 

Interest  &  Discount  .  .  18,000.00 

Gains  on  Sales 25,000.00 


11 


1 


V 


. 


t.<i 


♦ 


Accounting  Problems  and  Solutions. 

In  your  opinion  is  there  a  profit  or  a  loss?  The  directors  are  very 
desirous  of  showing  a  gain.  What  could  you  recommend  in  order  to 
meet  their  views,  and  yet  care  for  the  rights  of  the  stockholders? 

THEORY  OF  ACCOUNTS. 

(5)  How  are  dividends  declared?    From  what  funds  are  they  pay- 
able, and  what  penalties  attach  to  improperly  declaring  or  paying  them  ? 
manufacturing  concern;  state  the  advantages  and  disadvantages  of  each, 

(6)  Describe  at  least  two  methods  of  estimating  depreciation  for  a 
manufacturing  concern;  state  the  advantages  and  disadvantages  of  each, 
and  show  how  the  entries  would  be  made  in  the  books? 

(7)  It  frequently  occurs  that  on  preparing  a  balance  sheet,  it  is  found 
that  certain  assets  are  worth  more  than  the  figures  which  represent 
them  on  the  books  c.  g.  Real  estate  has  enhanced  in  value  as  proved 
by  bona  fide  scales  of  adjacent  and  similar  property.  The  market  price 
of  merchandise  on  hand  has  risen.  Market  quotations  on  bonds  and 
stocks  are  higher  than  when  such  securities  were  bought.  There  are  on 
hand  completed  goods  which  are  held  awaiting  completion  of  other 
goods  to  fill  orders  which  have  been  received. 

State  whether  or  not  it  is  proper  to  show  such  items  of  profit  or 
increase  in  the  profit  and  loss  account,  or  in  the  balance  sheet,  and 
if  so,  in   what   form   they  should   appear? 

(13)  What  is  the  best  plan  for  dealing  with  percentages  from  an 
accountant's  point  of  view?  If  an  article  cost  $100  and  is  sold  for  $125 
what  'do  you  consider  the  percentage  of  profit,  and  how  does  the  sellers 
view  of  this  often  differ  from  the  accountant's?  In  calculating  percent- 
ages on  such  account  as  a  merchandise  account,  where  purchases  are 
debited  and  sales  credited,  what  special  care  is  required  in  order  to 
obtain  correct  results? 

(15)  In  estimating  the  value  of  a  business,  some  accountants  lay 
stress  on  the  value  of  the  balance  sheet,  while  some  seem  disposed  to 
almost  ignore  it  and  depend  chiefly  on  the  revenue  account.  Which  of 
these  do  you  consider  correct?  Give  examples  of  the  danger  which  is 
likely  to  occur  from  carrying  each  view  to  an  extreme. 

COMMERCIAL  LAW. 

(2)  Give  a  brief  account  and  show  the  connection  between:— law 
merchant,  common  law,  statute  law. 

(8)  What  is  usury?  Give  the  legal  rates  of  interest  in  Florida,  and 
state  the  results  of  an  agreement  to  pay  more  than  the  legal  rate. 

(13)  Define  partnership.  How  many  kinds  of  partnership  are  there, 
and  wherein  do  they  differ  from  one  another? 


This  is  the  first  examination  since  the  passage  of  the  C.  P.  A.  law 
in  the  State  of  Florida,  and  in  a  measure  discloses  the  professional 
standard  required  by  the  Board.  Candidates  were  asked  in  each  of  the 
four  papers  to  answer  ten  questions  out  of  fifteen ;  the  first  five  questions 
being  required,  the  balance  elective.  The  three  papers  in  Theory  of 
Accounts,    Auditing,    and    Commercial    Law,    can   be   dismissed   without 

280 


C.  P.  A.  Examination  Questions. 

much  comment.  They  are  of  about  the  same  calibre  as  the  average 
paper  of  the  State  Boards  in  the  above  mentioned  subjects,  where  the 
four-subject  division  of  the  examinations  is  adhered  to.  What  attracts 
our  attention  is  the  paper  in  practical  accounting.  In  the  first  place,  we 
find  something  novel  in  it.  It  does  not  consist  of  two  or  three  printed 
pages  to  a  single  question,  and  yet  is  practical  in  text.  It  is  refreshing 
to  note  a  slight  change  from  the  ever  and  ever  repeated  routine.  A 
candidate's  ability  can  be  tested  by  a  short  practical  problem  just  as 
well  as  by  a  three  page  question.  On  the  other  hand,  it  is  too  much 
to  ask  of  a  candidate  to  answer  ten,  however  short,  practical  problems 
in  three  and  one-half  hours, — especially  so  when  among  the  ten  questions 
there  are  some  of  considerable  importance  requiring  special  attention 
and  reasoning.  The  board  furthermore  uses  terms  somewhat  inac- 
curately, which  in  an  examination  is  a  great  demerit 

However,  as  a  whole,  the  State  Board  of  Florida  is  to  be  congratu- 
lated in  that  it  starts  in  the  right  direction.  We  hope  that  the  members 
will  eliminate  the  small  defects  of  the  first  paper,  and  that  their  standard 
will  come  to  merit  general  approval  by  the  profession. 


Auditing. 

(Rhode  Island  Examination,  Thursday.  December  26,  1907 — 
9:30  A.  M.  to  12:30  p.  m.,  only.) 

(i)  What  is  your  understanding  of  a  cash  audit? 

(2)  What  measures  do  you  adopt  to  protect  yourself  against  imposi- 
tion by  persons  who  have  access  to  the  books  while  you  are  auditing 
them? 

(3)  What  proofs  do  you  apply  to  insure  the  correctness  of  an  audit? 

(4)  A  company  owns  all  of  the  capital  stock  of  another  company. 
This  company  has  outstanding  an  issue  of  bonds  not  guaranteed  by  the 
company  holding  the  stock.  The  assets  of  this  subsidiary  company  are 
deemed  insufficient  to  cover  the  bonds,  so  that  its  capital  stock  has  no 
value.  The  owning  company  desires  the  auditor  to  prepare  its  balance 
sheet,  setting  up  the  assets  of  this  subsidiary  company  along  with  other 
assets  directly  owned  and  the  bonds  as  liabilities.  Is  it  proper  for  him 
to  do  so  under  the  circumstances?    Give  reasons  for  your  answer. 

(5)  What  do  you  consider  a  complete  checking  of  (a)  the  general 
journal,  (6)  the  purchase  journal? 

(6)  What  is  your  method  of  checking  dividends  paid? 

(7)  A  New  York  company  sells  its  capital  stock  at  a  premium  and 
the  directors  pass  a  resolution  to  declare  a  dividend  out  of  the  surplus 
thus  paid  in.  Would  you  call  attention  to  this  action  if  asked  to  make 
up  the  accounts,  and  if  so,  why? 

(8)  In  examining  the  books  of  a  corporation  you  find  that  an  officer 
is  a  -partner  in  a  business  from  which  the  corporation  makes  purchases. 
Upon  scrutiny  you  find  that  all  the  transactions  are  at  proper  figures. 

261 


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Would  you  under  such  conditions  call  attention  to  the  fact  when  making 
your  report  to  the  directors?  ^ 

(9)  A  concern  owns  a  parcel  of  real  estate  which  cost  it  $500,000 
There  is  a  purchase  money  on  it  of  $350,000.    You  are  asked  to  enter 

he  same  in  the  balance  sheet  of  $350,ocx.  net.     Would  you  comply  with 
this  request?    Give  reasons   for  your  answer. 

(10)  A  person  is  interested  in  the  profits  of  a  corporation  but  is  not 
a  shareholder  therein.  He  objects  to  having  the  preliminary  expenses 
r^alons  ^""^  ^''''  accounts.    Is  his  position  tenable?    Give 

(11)  A  manufacturing  concern  buys  raw  materials  in  advance  for 
its  needs.  These  are  liable  to  fluctuations.  At  what  prices  should  they 
be  inventoried?     Why?  ^ 

(12)  Under  the  law  permitting  payment  of  dividends  solely  out  of 
surplus  earned,  a  corporation  pays  a  dividend  out  of  general  surplus 
after  carrymg  its  losses  for  the  period  against  the  account.  Would  you 
make  mention  of  the  fact  in  the  recital  accompanying  your  statements 
or  would  you  let  it  go  without  specific  mention?    Give  reasons 

(13)  Three  months  after  the  close  of  the  fiscal  year  you  are  requested 
to  audit  a  set  of  books  to  the  end  of  the  fiscal  year.  How  do  you  ascer- 
tain  if  the  cash  called  for  by  the  books  was  actually  on  hand  and  in  bank? 

(14)  A  teller  is  found  to  be  short  in  his  cash.  He  has  been  in  the 
position  for  a  period  of  three  years  and  has  a  daily  record  of  cash  on 
hand.    His  bond  of  suretyship  antedates  the  discovery  of  the  shortage 

//v'u?  °/  ''''  "'°"^^''  ^'^"^  '^  ^^"^^^"^  ^  ^^^"se  that  the  surety  shall 
not  be  liable  for  a  shortage  existing  at  the  date  the  bond  became  effective 
You  are  employed  by  the  surety  to  ascertain  if  the  shortage  falls  within 
the  period  of  the  bond.  What  steps  would  you  take?  Do  you  think 
that  you  would  be  successful? 

(15)  What   is   the   objection   to   loose   leaf  depositors*   ledgers? 


Commercial  Law. 

(Rhode  Island  Examination.  Friday.  December  27.  1907 

I  :30  p.m.  to  4:30  p.  m..  only.) 

(1)  What  is  meant  by  the  term  "  rebate  "  ?    State  a  common  method 
or  misuse  of  rebate. 

(2)  Define  the  term  "  directors." 

(3)  What  is  an  account  stated,  and  what  is  its  legal  effect? 

(4)  Explain  the  term  "primage"  as  originally  known,  and  state  its 
modern  use. 

(5)  State   clearly   the    meaning   of   general   average   and   particular 
average. 

(6)  Give  a  succinct  but  clear  idea  of  commercial  paper. 

(7)  What  is  meant  by  the  term  «  commercial  law  "  ?    State  its  funda 
mental  features. 

282 


C.  P.  A.  Examination  Questions. 

(8)  Define  the  term  "commissions,"  and  state  what  is  meant  by  "del 
credere"  commission. 

(9)  What  is  meant  by  the  term  "  replevin "  ?  State  its  legal  scope 
and  limitations. 

(10)  What  is  lien?    Name  and  describe  each  kind  of  lien. 

(11)  What  are  National  Banks?  What  were  the  conditions  incidental 
to  the  establishment  of  National  banks?  How  is  a  National  bank 
organized  ? 

(12)  State  in  what  respect  do  the  powers  granted  a  National  bank  and 
those  of  a  trust  company  differ,  and  what  is  the  liability  attaching  to 
stockholders  in  each? 

(13)  How  and  when  will  bills  receivable  become  bills  payable? 
Explain  fully,  and  give  example  in  a  legal  sense. 

(14)  Give  in  a  general  manner  requirements  of  the  law  governing 
the  organization  of  corporation  in  the  State  of  Rhode  Island,  and  state 
what  class  of  corporations  can  be  organized  under  the  general  laws. 

(15)  State  briefly  the  nature  of  the  Rhode  Island  Mechanic's  Lien 
Law,  and  when  and  how  the  law  becomes  operative. 


Practical  Accounting. 

(Rhode  Island  Examination.  Thursday,  December  26,  1907 — 
1 :30  P.  M.  to  4:30  p.  M.,  only.) 

(i)  An  issue  of  $250,000  fifty  year  bonds,  dated  July  i,  1904,  19 
redeemable  by  a  sinking  fund  into  which  annual  cash  instalments  are 
to  be  paid  by  deposit  of  funds  in  a  trust  company  which  allows  interest 
at  the  rate  of  two  per  cent,  per  annum,  credited  January  i  and  July  i. 
Separate  books  are  to  be  kept  solely  for  recording  the  sinking  fund 
operations.  The  fund  so  created  is  to  be  invested  in  interest-bearing 
securities,  and  the  income  therefrom  is  to  be  applied  to  the  reduction  of 
the  succeeding  annual  instalments. 

On  July  1,  190S,  the  first  instalment  of  $S,ooo  was  paid  into  the  fund, 
and  on  the  same  day  the  following  investments  therefor  were  made: 

Two  five  per  cent,  bonds  of  $1,000  each  April  i,  and  October  i,  at  par 
and  accrued  interest. 

Two  six  per  cent,  bonds  of  $1,000  each.  May  i  and  November  i,  at 
$110  and  accrued  interest. 

On  July  I,  1906,  the  second  instahnent  was  duly  deposited  to  the 
credit  of  the  fund,  and  on  the  same  day  the  five  per  cent,  bonds,  pur- 
chased in  the  previous  year  were  sold  at  loi  and  accrued  interest,  and 
other  investments  were  purchased  as  follows: 

Two  6%  bonds  of  the  same  issue  as  those  purchased  in  the  previous 
year  at  105  and  accrued  interest. 

Five  4%  bonds  of  $1,000  each,  Feb.  i  and  Aug.  i,  at  98  and  accrued 
interest. 

The  income  from  all  investments  was  regularly  received  and  deposited, 

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Accounting  Problems  and  Solutions. 

and  the  value  of  the  6%  bonds  purchased  in  1905  was  written  down 
to  conform  to  the  value  of  the  bonds  of  the  same  issue  purchased  in 
1906  at  the  same  time  of  said  letter  purchase. 

Frame  journal  entries  and  write  up  the  sinking  fund  ledger  accounts 
showmg  the  amount   of  the   cash   instalments,   payable   on   both  July   i 
1906,  and  July  i,  1907,  and  the  status  of  the  sinking  fund  at  said  dates 

(2-3)  The  affairs  of  Peter  Post,  a  manufacturer,  were  in  a  very 
critical  condition,  for  although  he  had  an  unimpaired  investment  of 
$62,500,  and  his  books  showed  a  clear  increase  of  $6,022,  he  owed  his 
trade  creditors  $25,289  and  had  only  $265  in  cash  and  $4,062  in  receiv- 
able book  accounts  on  which  to  rely  for  funds.  The  rest  of  his  business 
estate  was  tied  up  in  the  following  chattels  which  he  had  acquired  in  an 
effort  to  keep  pace  with  a  business  growth  that  had  outrun  his  capital- 
machinery  and  tools  $3i,497;  raw  materials  $18,838;  partly  made  goods 
$31,562,  and  finished  wares  $7,587.  It  was  also  necessary  in  order  to  con- 
tinue operations  to  have  immediate  cash  for  pay  rolls  and  incidental 
expenses. 

A  meeting  of  his  principal  creditors  was  called  and  as  it  appeared  that 
the  business  was  well  established,  profitable  and  had  a  sure  and  growing 
market,  they  decided  to  advance  him  $6,000  in  cash  for  immediate  needs 
and  extend  his  credit  in  a  sufficient  amount  to  permit  of  the  purchase 
of  necessary  materials  and  generally  to  continue  operations  till  the  present 
stock  of  materials  could  be  made  up  and  realized  on. 

In  order  to  insure  the  proper  application  of  the  funds  and  credit  so 
provided,  a  trustee  was  appointed  to  administer  the  finances  till  the 
creditors'  claims  were  satisfied,  at  which  time  the  control  would  revert 
to  the  proprietor. 

The  subsequent  operations  under  the  trusteeship  were  as  follows:  cash 
paid  for  labor  $15,725;  for  expenses  $5,430;  for  additional  tools  $750; 
purchases  on  book  account,  charged  to  materials  $6,300,  to  expenses 
$15,000;  sales  on  book  account  $72,300;  loss  on  collection  of  book  debts 
$380;  personal  drawing  of  Peter  Post  $3500. 

The  unliquidated  values  at  the  close  of  the  trusteeship  were  as  fol- 
lows :  inventory  of  raw  materials  $5,000 ;  finished  wares  $27,900 ;  accounts 
receivable  outstanding  $3,382,  and  accounts  payable  $89. 

Prepare  with  due  regard  to  the  grouping,  order,  and  arrangement  of 
the  Items,  as  best  calculated  clearly  to  display  the  facts,  (a)  realization 
and  liquidation  account,  (b)  trustee's  cash  account,  (c)  balance  sheet 
of  business  as  restored  to  Peter  Post. 

(4)  The  Nassau  Engineering  Company  fails  and  a  receiver  is 
appointed  on  March  i,  1907,  who  on  taking  charge  finds  the  company's 
liabilities  and  assets  to  be  as  follows:  creditors  unsecured,  $59,100;  partly 
secured  $16,500,  fully  secured  $13,500.  The  company  owns  real'  estate 
$15,000,  which  is  mortgaged  for  $10,000;  machinery  and  tools,  $30000- 
materials,  $3,000  and  book  debts  $9,000,  including  $2,500  in  litigation  on 
which  a  loss  of  50%  is  expected ;  also  securities  of  the  value  of  $22  500 
required  in  settlements,  of  which  $7,500  are  pledged  with  partly  secured 

284 


C.  P.  A.  Examination  Questions. 

creditors  and  $14,000  with  fully  secured  creditors.  These  are  engineering 
contracts  in  force  to  the  amount  of  $60,000  on  which  $45,000  has  been 
expended.  Cash  in  bank  $750.  The  capital  stock  of  the  company  is 
$75,000,  and  the  accumulated  losses  on  contracts,  bad  debts,  written  oflF, 
and  expenses  show  a  deficiency  of  $48,850.  Customer'  bills  have  been 
discounted  to  the  amount  of  $4,500,  of  which  $1,500  will  be  dishonored 
in  consequence  of  failure  of  obligor.  The  machinery  and  tools  are 
expected  to  realize  only  50%  of  the  book  value  and  the  real  estate  is 
appraised  at  $12,000.  The  cost  to  complete  contracts  is  estimated  at 
$30,000  by  the  securities  who  offer  $2,250  for  the  stock  of  materials  on 
hand.  Unpaid  taxes  and  assessments  amounting  to  $216  are  discovered 
but  no  entry  thereof  appears  in  the  company's  books. 

Prepare  a  statement  of  affairs  and  deliciency  account  in  technical  form. 


Theory  of  Accounts. 

(Rhode  Island  Examination,  Friday,  December  27.  1907 — 
9:30  a.  M.  to  12:30  P.  M.,  only.) 

(i)  Define  the  term  "bookkeeping."  What  two  objects  are  sought 
to  be  attained  by  it? 

(2)  What  is   (a)   a  journal,   {h)   a  ledger? 

(3)  What  is  (a)  a  balance  sheet,  (Z;)  a  trial  balance? 

(4)  How  is  the  profit  or  loss  arrived  at  from  a  set  of  books? 

(5)  Name  the  different  classes  of  accounts  and  define  each  of  them. 

(6)  State  the  process  of  closing  a  ledger  and  show  what  is  meant 
by  a  balance  account. 

(7)  Why  must  the  revenue  account  be  completed  before  a  balance 
sheet  can  be  prepared? 

(8)  What  are  the  advantages  of  a  columnar  cash  book? 

(9)  Describe  the  system  of  running  a  discount  column  in  the  cash 
book  and  show  how  the  entries  are  made  both  in  the  general  ledger 
and  in  the  subsidiary  ledger. 

(10)  What  do  you  understand  by  a  trading  account? 

(11)  How  would  you  record  a  consignment  in  the  books  of  (a) 
the  consignor,   {h)   the  consignee? 

(12)  In  the  case  of  a  partnership  how  would  you  dispose  of  the 
balance  of  the  profit  and  loss  account? 

(13)  Name  and  define  (a)  the  two  classes  of  receipts,  (&)  the  two 
classes  of  expenditures. 

(14)  What  do  you  understand  by  a  self-balancing  purchase  ledger? 
Describe   fully  the  method   of  keeping  it. 

(is)  The  following  accounts  are  found  in  the  books  of  a  corporation; 
state  which  of  them  would  enter  the  profit  and  loss  account  and  balance 
sheet,  and  which  would  show  debit  and  credit  balances;  reserve  fund, 
depreciation  on  furniture,  bad  debt  reserve,  bond  redemption  account, 
bills  receivable,  rent  of  properties  owned,  dividend  on  preferred  stock. 

285 


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The  following  are  representative  problems  from  the  C  P.  A.  examina- 
tions set  by  the  California  State  Board  of  Accountancy  on  May  28th, 
29th  and  30th,  1908,  with  comments: 

THEORY  OF  ACCOUNTS. 

1.  Describe  the  usual  method  of  procedure  in  determining  the  net 
profit  or  loss  of  a  business,  the  books  being  kept  by 

a.  Single  entry. 

b.  Double  entry. 

2.  Define  the  following  and  explain  the  difference: 

a.  Revenue  account. 

b.  Trading  account. 

3.  Describe  and  state  purposes  of  a  Deficiency  Account. 

4.  Define  the  following  accounts: 

a.  Personal. 

b.  Impersonal. 
c    Real. 

d.    Nominal. 

5.  For  what  purpose  would  the  analysis  of  a  ledger  be  made?    Explain 
the  method  you  would  pursue. 

AUDITING. 

1.  State  the  different  kinds  of  audits  and  describe  them. 

2.  What  would  be  required  from  a  firm  or  corporation  by  an  auditor 
before  entering  upon  the  audit  of  the  books? 

3.  In  making  the  first  periodical  audit  of  a  corporation  that  had 
personally  taken  over  the  business  of  a  firm,  what  would  you  include  in 
your  examination  beside  the  usual  books  and  accounts,  and  for  the 
purpose  of  ascertaining  what  facts? 

4.  From  the  information  gathered  and  noted  throughout  an  audit, 
what  matters  would  you  call  especial  attention  to,  and  what  schedules 
and  statistical  statements  would  you  furnish  the  client? 

5.  What  constitutes  capital  expenditure? 

6.  Would  an  auditor  be  justified  in  certifying  to  the  accuracy  of  ac- 
counts in  which  such  expenditure  appeared  without  making  inquiry  into 
the  real  character  of  same?    If  not,  why  not?    If  he  would,  why? 


I. 


2. 

3. 


COMMERCIAL  LAW. 
Define  a  general  partnership  and  also  the  following: 

a.  Nominal  partner. 

b.  Silent  partner. 

c-    Dormant  partner. 

d.    Special  partner. 
Define  a  corporation  and  name  the  different  kinds. 
What  acts  of  a  corporation  are  "ultra  vires"? 

286 


4. 

5. 
6. 


C.  p.  A.  Examination  Questions. 

Define  a  contract,  and  state  what  contracts  must  be  in  writing. 
Define  a  sale  of  personal  property,  and  define  a  consignment 
State  the  points  of  difference  between  a  sale  and  a  consignment 

PRACTICAL  ACCOUNTING. 
I.    Two  partners  named  Wilson  and  Peters  find  at  the  end  of  the 
first  year's  business  the  Balance  Sheet  shows  that  Wilson's  interest  is 
worth  $18,000.00.  and  Peters'  $9,000.00. 

The  Goodwill  of  the  firm  is  worth  $3,000.00.     Each  draws  profits  in 
the  proportion  of  his  investment 

They  conclude  to  take  in  another  partner,  and  he  is  to  have  a  one- 
quarter  interest  in  the  new  firm. 

What  sum  must  the  new  partner  contribute?    How  will  the  partner- 
ship accounts  appear  after  the  payment  in  of  the  additional  capital? 

How  will  the  profits  be  divided  ?    Give  skeleton  form  of  accounts. 

2.    The  firm  of  Jones,  Smith  &  Brown  failed,  and  the  following  is 
the  data  the  books  disclosed : 

Unsecured  creditors:  E,  $35,000.00;  F,  $27,500.00;  G,  $26,000.00;  H, 
$24,500.00;  I,  $17,500.00;  J,  $15,000.00;  K,  $2,000.00;  Rent,  $500.00; 
Preferred,  $750.00;  Book  accounts  receivable,  $42,500.00  of  which  there 
are  Good  accounts  $37,500.00,  Bad  accounts  $3,125.00,  Doubtful  $1,875.00, 
estimated  to  produce  $625.00;  Bills  Receivable,  A,  3.000.00;  B,  $4,250.00; 
Q  $2'5oo.oo;  D,  $1,500.00;  Land  and  Buildings,  $25,000.00;  Plant  and 
Machinery  $8,500.00;  Merchandise  on  hand.  $5,000.00;  Furniture  and 
Fixtures  $1,500.00;  Cash  on  hand,  $15,000.00;  Sundry  profits,  $37,500.00; 
Sundry  losses,  $30,000.00;  Trading  expenses,  $17,500.00;  Jones'  capital 
account,  $5,000.00,  and  drawings  $10,000.00;  Smith's  capital  account, 
?3,75o.oo.  and  drawings  $15,000.00;  Brown's  capital  account,  $3,750.00,  and 

ofTcsT  ^"';TZ'  ^^""  '""  ^°"  """^^  ^^^^  P-P-^<^  the  statements 
of  Assets  and  Liabilities,  etc.,  if  you  had  been  employed  to  do  the  work 

the^fnl^"  December  31,  1886,  the  Balance  Sheet  of  a  corporation  showed 
the  following  assets  and  liabilities: 


Capital   Stock    $200,000.00 

Creditors*  Accounts    ..     20,000.00 

Bills    Payable    26,000.00 

Profit  and  Loss  20,500.00 


Real  Estate   $55.ooo.oo 

^^^"*    95,000.00 

Accounts  Receivable  ..  45,500.00 

Inventory    S9,ooo.oo 

Cash  on  hand 12,000.00 

the'folbwing""'"  '''  '^''  '"  "^'^  ''*"'  *''  ^'^'"^'  ^'^^*  ^'""^ 


Capital   Stock   $200,000.00 

Creditors'  Accounts    ..    22,000.00 

Mortgage    20,000.00 

Profit  and  Loss  38,900.00 


Real  Estate   $57,000.00 

P^ant 85,500.00 

Accounts    Receivable  . .  43,500.00 

Inventory 73,750.00 

Cash  on  hand  11,150.00 

Other  Investments  ....  10,000.00 
Frepare  tabulations  showing  what  has  become  of  the  profits. 

287 


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Accounting  Problems  and  Solutions. 

A  perusal  of  the  above  examination  paper  will  convince  any  one  that 

the  editorial  remark  in  the  September  issue  of  The  Journal  of  Account- 
ancy about  forming  an  association  of  the  various  State  Boards 
of  Accountancy  for  the  purpose  of  maintaining  a  uniform  stand- 
ard of  examination  is  timely.  A  comparison  of  the  California 
paper  with  the  examination  papers  of  some  of  the  other  states, 
such  as  Pennsylvania  and  New  York,  will  reveal  the  compara- 
tively low  standard  maintained  by  the  California  State  Board. 
The  questions  in  theory  of  accounts  have  been  repeated  over  and  over 
again  practically  by  all  the  American  and  foreign  examining  bodies,  so 
that  one  who  reads  only  the  accounting  manuals  and  magazines  ought 
to  be  able  to  answer  them  without  the  slightest  exertion.  The  same 
remarks  are  true  of  the  paper  in  Commercial  Law.  While  the  Auditing 
paper  seems  to  disclose  a  little  more  care,  the  paper  in  Practical  Account- 
ing does  not  require  any  intelligence  out  of  the  ordinary,  especially  as 
an  hour's  time  is  allotted  to  each  problem. 

Throughout  the  examination  the  Board  seems  to  have  been  very 
liberal  with  time  allowances,  tending  toward  the  opposite  extreme  from 
some  of  the  other  State  Boards  who  allow  very  little  time  for  a  compara- 
tively difficult  paper. 

Auditing. 

(Illinois  Examination,  May,  1908.) 

Chicago,  III.,  May  4th,  1908. 

(Time,  3  hours.) 

(i)  In  a  case  where  the  preferred  shares  of  a  company  are  issued 
under  a  provision  that  the  annual  dividends  to  which  they  shall  be  entitled 
shall  be  "  cumulative,"  would  you  consider  it  necessary  to  show  any 
arrears  of  dividend  as  a  liability  upon  the  balance  sheet,  or  how  would 
you  deal  with  it? 

(2)  What  special  points  in  the  balance  sheet  of  a  company,  aside 
from  the  correctness  of  the  figures,  require  careful  consideration  by  the 
auditor  ? 

(3)  In  making  an  audit  of  the  accounts  of  a  corporation,  would 
you  consider  it  part  of  your  duty  to  verify  the  transfers  of  the  certifi- 
cates of  capital  stock  occurring  during  the  period  covered  by  your 
examination  ? 

(4)  In  financing  a  manufacturing  company,  it  is  considered  necessary 
to  arrange  for  an  issue  of  $300,000  first  mortgage  5  per  cent.  20  year 
bonds;  $500,000  6  per  cent,  non-cumulative  preferred  stock,  which  may 
be  retired  any  time  after  five  years,  and  $1,000,000  common  stock.  The 
bonds  are  disposed  of  at  90  per  cent,  of  their  face  value  and  proceeds 
used  for  erecting  buildings  and  purchase  of  machinery  and  equipment. 

The  preferred  stock  is  sold  at  85  and  one  share  of  common  stock  is 
given  with  each  share  of  preferred  stock,  the  common  stock  remaining 

288 


C.  P.  A.  Examination  Questions. 

being  disposed  of  at  40.    How  would  you  deal  with  the  discount  in  each 
case? 

(5)  A  company  whose  capital  stock  is  $250,000,  divided  into  $100,000 
6  per  cent,  non-cumulative  preferred  shares  and  $150,000  common  shares, 
begins  its  life  with  an  excess  of  liabilities  over  real  assets  to  the  extent 
of  $10,500,  which  sum  is  debited  to  suspense  account.  During  the  first 
few  years  small  losses  are  made  and  carried  forward  on  the  profit  and 
loss  account,  but  finally  sufficient  profits  are  earned  to  wipe  out  the  losses 
of  the  previous  years  and  leave  a  balance  of  $16,500. 

The  holders  of  the  preferred  stock  claim  that  any  surplus  profit,  after 
payment  of  the  preference  dividend,  should  be  used  to  extinguish  the 
suspense   account. 

The  holders  of  the  common  stock  claim  that  all  of  such  surplus  is 
properly  available  for  their  dividend  on  the  ground  that  the  original 
deficiency  carried  to  suspense  account  was  in  effect  a  charge  to  goodwill. 

Give  briefly  your  understanding  of  "goodwill."  State  how  you  would 
deal  with  it  in  this  case,  and  whether  the  directors  may  pay  any  dividend 
on  the  common  stock. 

(6)  A  surburban  traction  company,  after  equipping  its  line  at  a  very 
considerable  expense  for  overhead  trolley  and  operating  same  for  several 
years,  decides  to  adopt  the  third  rail  system.  Extensive  changes  are 
necessary  in  changing  power  houses,  rearranging  tracks,  and  ahering  cars, 
involving  an  expenditure  of  $25,000.  In  addition  considerable  machinery 
and  rolling  stock,  the  original  cost  of  which  had  been  treated  as  a 
capital  outlay  and  was  carried  on  the  books  at  a  valuation  of  $25,000, 
is  rendered  obsolete  and  is  disposed  of  for  $3,500,  showing  a  loss  of 
$21,500.    The  profits  from  operation  for  the  year  are  $18,000. 

State  how  you  would  recommend  that  the  matter  be  dealt  with  in 
the  company's  accounts,  and  whether  the  company  can  pay  a  dividend? 

(7)  A  firm  having  several  branches  maintains  an  account  with  each 
branch  in  the  ledger  and  charges  to  such  account  all  goods  sent  to  the 
agents  for  stock.  When  stock  is  taken  the  balance  of  each  branch  account 
is  treated  as  ordinary  accounts  receivable  and  is  included  in  the  general 
debts  owing  to  the  firm.  If  you  see  any  objections  to  this  method,  state 
them,  and  say  how  you  would  deal  with  the  accounts. 

(8)  Presuming  that  upon  examination  of  a  merchant's  accounts  the 
balance  shown  by  the  bank  pass  book,  or  certified  by  the  bankers,  agreed 
with  the  balance  shown  in  the  merchant's  book,  would  you  consider  any 
further  examination  necessary? 

State  reasons  for  your  reply. 

(9)  Define  your  understanding  of  principle  involved  in  determining 
what  arc  and  what  are  not  expenditures  from  capital. 

(10)  You  are  instructed  to  make  an  audit  by  a  merchant  selling 
finished  goods,  or  by  a  manufacturer.  State  all  your  responsibilities. 
Name  the  financial  statements  you  should  make  and  give  a  form  of 
certificate. 

289 


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Accounting  Problems  and  Solutions, 


Theory 

(Illinois  Examination,  May,  1 908.) 

Chicago,  III.,  May  4,  1908. 

(Time,  3  hours.) 

(i)  State  the  most  approved  method  to  be  adopted  in  writing  off 
the  cost  of  a  lease  extending  over  several  years. 

(2)  What  is  a  consignment  account  and  how  should  it  be  stated  in  a 
balance  sheet? 

What  is  the  general  purpose  of  a  distribution  account? 

(3)  Note  different  methods  by  which  depreciation  on  patents,  build- 
ings and  machinery  may  be  provided  for,  and  outline  briefly  your  opinion 
as  to  the  most  desirable  course  to  be  adopted. 

(4)  State  your  understanding  of  the  difference  between  gross  profit 
and  net  profit. 

(5)  Wherein  does  a  trading  account  differ  from  a  profit  and  loss 
account? 

(6)  Give  your  understanding  of  the  terms: 

(a)  Fixed  assets. 

(b)  Floating  assets. 

(c)  Wasting  assets. 

(d)  Floating  debt. 

Under  which  heading  would  you  place  cash,  bills  payable,  machinery, 
buildings?  Give  other  illustrations  that  may  occur,  to  you  and  reasons 
for  your  opinion  in  each  case. 

(7)  Define: 
Cash  discount. 
Trade  discount. 
Returns  and  allowances. 

Give  your  definition  of  a  correctly  extended  inventory. 

(8)  An  irrigation  company  which  in  past  years  has  issued  two  classes 
of  preferred  stock  at  5  and  4  per  cent.,  respectively— also  certain  6  per 
cent,  debentures— is  able  to  consolidate  them  into  one  general  issue  desig- 
nated general  consolidated  preferred  stock  at  4}^  per  cent. 

Illustrate  the  method  of  placing  the  transaction  on  the  books  and 
state  how  you  would  adjust  any  nominal  increase  of  stock  incidental 
to  the  operation. 

(9)  Wherein  does  a  balance  sheet  usually  differ  from  a  statement  of 
affairs  ? 

(10)  What  do  you  consider  the  important  features  of  a  modern 
adequate  system  of  accounting  for  a  manufacturing  concern? 


C.  P.  A.  Examination  Questions. 


Practical  Accounting. 

(Illinois  Examination.  May.  1908.) 

Chicago,  III.,  May  5,  1908. 

(Time,  6  hours.) 

^^  (I)  Proposition  A.    In  1906  a  manufacturer's  gross  sales  amounted 

against  which  his  outlay  was : $202,706.00 

Iviatenal 

Wages      • $94,64500 

Shop  expense"*.'.'.;;;;;;;; fi'ri^^ 

Administrative   expense    .^^V.  ..I... ...['.  1425000 

State  the  ratios  of  the  several  features  of  departmental'  expense  to 
the  gross  sales,  also  the  per  centum  of  profit. 

Proposition  B.    The  same  excepting 

Gross    sales    ^ 

$435,000.00 

Material    *^^ 

Wages  ?233,ooo.oo 

Shop    expense".*.'.'.'.'. 88,840.00 

Administrative   expense    y^^y.'.'.'.'.'.'.'.'.'.'.['.     i7;58s*oo 

Review  the  conditions  and  apparent  causes  that  result  in  the  great 
difference  shown  in  the  percentage  of  profit  between  the  two  propositions. 

(2)  On  January  i,  1900,  A  purchases  the  plant  and  business  of  B  for 
$400,000,    payable    $100,000    cash;    $150,000    January    i,    1901;    $150000 

*T'l''/^^'  "^'^^  '"^"'"'^  °"  ^"^"'"^^  payments  at  6  per  cent.  None 
of  the  book  accounts  or  stock  of  finished  goods  on  hand  January  i,  1900, 
are  mcluded  m  the  sale,  but  are  specifically  reserved  by  B.  Of  such^e 
accounts  receivable  are  $28,500  and  finished  goods,  per  inventory,  $45,000 
The  agreement  further  stipulates  that  B  shall  operate  the  plant  during 
the  year  1900  and  shall  be  re-imbursed  on  January  i,  1901,  for  all  funds 
advanced  for  supplies  expense,  labor,  or  any  other  purpose,  in  connection 
with  the  operation  of  the  business  during  1900,  as  shown  by  B's  books 
Such  advances  to  be  computed  monthly  and  to  bear  interest  from  the 
last  day  of  each  month  at  6  per  cent,  per  annum  to  January  i,  iqqi  The 
profits  of  the  business  for  the  year  1900  to  belong  to  A. 

On  December  31,  1900,  B  reports  that  inventory  of  finished  goods  o. 
Hand  is  $48,500.    Expenses  have  been  $284,000  and  sales  $350,000. 

Condensed  particulars  of  transactions  are  as  follows: 


291 


Accounting  Problems  and  Solutions. 


C.  P.  A.  Examination  Questions. 


ii,'' 


If  w 


Sales. 

January $15,000 

February 10,000 

March 5,000 

April 5,000 

May 5,000 

June 5,000 

July 100.000 

August 80,000 

September 75,000 

October 25,000 

November 15,000 

December 10,000 


Cash 

Cash 

Interest 

Collections. 

Advances 

Due  B. 

$10,000 

$10,000 

$550.00 

15,000 

25,000 

1,250.00 

10,000 

12,000 

540.00 

15,000 

32,000 

1,280.00 

5.500 

35.000 

1,225.00 

18,000 

25,000 

750.00 

55. 000 

30,000 

750.00 

75,000 

25,000 

500.00 

55. 000 

30,000 

450.00 

45.000 

30,000 

300.00 

50,000 

15,000 

75.00 

19,000 

15,000 

$350,000      $372,500      $284,000      $7,670.00 

B  presents  the  following  statement  to  A  on  January  i,   1901,  and 
requests  settlement: 
Sale  of  plant  and  business  as  per  contract $400,000 

Less  cash  paid  by  A  January  i,  1900 100,000 

$300,000 

Interest  6  per  cent.,  i  year 18,000 

Adyanced  by  B  monthly 284^000 

Interest  on  advances ] . ' '       7^670 


Sales. 


$609,670 
•  •• 3501O00 


Balance  due  B $259,670 

Of  which  $150,000  deferred  to  Jan.  i,  1902 150^000 

Due  January  i,  1901 $109,670 

A  is  not  satisfied  with  statement  and  employs  certified  public  account- 
ants to  investigate  and  report  another  basis  of  settlement.  It  is  found 
that  the  accounts  receivable,  December  31,  1900,  are  $6,000,  and  B  has 
taken  these,  as  well  as  the  finished  goods  remaining  on  hand  ($48,500) 
and  claims  both  items  belong  to  him.    There  are  no  liabilities. 

Make  statement  for  A,  as  requested,  using  your  own  methods.  B*s 
Statement  of  interest  on  advances  may  be  assumed  to  be  correct  in  this 
question. 

(3)  You  are  called  upon  to  audit  the  accounts  of  Roland,  Stone  &  Co., 
stock  brokers,  Chicago,  as  of  January  11,  1908. 

Statement  "  A  "  is  account  current  rendered  by  Henry  Hudson  &  Co., 
the  New  York  correspondents  of  Roland,  Stone  &  Co. 

Statement  "  B "  is  account  current  made  up  from  Stone's  books. 

Bring  down  long  and  short  currency  balances  on  statement  "A"  and 
establish  net  balance. 

Also  show  balance  of  stocks  open,  both  long  and  short. 

Bring  down  stock  balances  on  statement  "B,"  both  long  and  short. 

Make  up  reconciliation  statement,  showing  currency  differences 
between  "  A  "  and  "  B  "  statements. 


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AFTERNOON  SESSION. 

(4)  A  railroad  corporation,  owning  an  important  system  of  rail- 
ways, secures  the  passage  of  a  law  under  which  it  has  power  to  acquire, 
hold,  and  vote  stocks  in  other  corporations.  It  acquires  approximately 
90  per  cent,  in  each  case  of  the  capital  stocks  of  three  smaller  railroad 
corporations  owning  feeder  lines. 

Prepare  for  illustration  condensed  balance  sheets  of  the  four  com- 
panies prior  to  the  merger,  showing  in  each  case  the  following: 

ASSETS. 

Property   rights   and   franchises. 
Materials  and  supplies  on  hand. 
Accounts  receivable. 
Cash  on  hand. 
Unearned  insurance. 

LIABILITIES. 

Bonded  debt. 

Capital  stock 

Bills  payable. 

Accounts  payable. 

Accrued  interest  and  taxes. 

Surplus. 

The  larger  company  takes  over  the  materials  and  supplies  on  hand, 
and  also  the  cash  on  hand  of  the  three  subsidiary  companies,  and  the 
stock  of  the  subsidiary  companies  is  acquired  in  exchange  for  a  new  issue 
of  preferred  stock  of  the  larger  company,  dollar  for  dollar.  Based  upon 
the  trial  balances  which  you  use  for  illustration,  prepare  trial  balances 
of  all  of  the  companies  as  they  should  appear  when  the  merger  has  been 
accomplished. 

(5)  Review  question  No.  2  (as  given  this  morning)  and  criticise 
method  adopted  by  B  in  calculating  interest  on  advances.  Provided  you 
had  full  access  to  B's  books,  state  how  you  would  work  out  the  accounts 
and  establish  a  thoroughly  correct  basis  of  settlement.  What  essential 
errors  of  principle  can  be  shown  in  B's  statement? 

(6)  You  are  employed  to  conduct  the  accounting  for  a  public  utility 
proposition  just  incorporated.  It  involves  the  accounting  for  both  the 
construction  and  operation  of  the  plant.  The  company  incorporates 
under  the  laws  of  the  State  of  Illinois  and  issues  its  stock  and  bonds, 
the  proceeds  of  which  are  used  to  build  the  plant. 

Give  opening  capital  entries  and  divisional  charges  in  construction 
and  outline  an  operating  system  of  accounts.  In  the  opening  and  con- 
struction entries  use  your  own  figures. 


n 


394 


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Accounting  Problems  and  Solutions. 

Commercial  Law. 

(Illinois  Examination,  May,  1908.) 

Chicago,  III.,  May  6,  1908. 

(Time,  3  hours.) 

(i)  How  does  the  h"ability  of  a  guarantor  differ  from  that  of  an 
endorser  of  a  promissory  note  in  Illinois? 

(2)  A  corporation  called  The  Western  Trading  Company  was  incor- 
porated under  the  laws  of  the  State  of  Illinois.  A  certificate  of  complete 
organization  was  issued  by  the  Secretary  of  State  and  everything  neces- 
sary to  constitute  this  a  de  jure  corporation  was  done  except  to  record 
the  certificate  in  the  office  of  the  Recorder  of  Deeds  of  Cook  County,  the 
principal  office  of  the  company  being  in  Chicago.  After  the  company  was 
thus  organized,  its  president  ordered  some  bonds  engraved  by  the  Ameri- 
can Bank  Note  Company,  and  the  bonds  not  being  paid  for  on  delivery, 
the  work  thus  ordered  having  been  charged  to  the  Western  Trading  Com- 
pany on  the  books  of  the  plaintiff  company  and  bills  rendered  accordingly, 
the  latter  company  sued  the  president  of  the  Western  Trading  Company 
for  the  contract  price  of  the  work.  The  court  gave  judgment  for  the 
plaintiff  on  the  ground  that  the  Western  Trading  Company,  not  having 
filed  in  the  office  of  the  Recorder  copy  of  its  articles  of  incorporation, 
as  required  by  law,  was  incapable  of  contracting  and  could  not_be  held 
liable  on  this  contract.    Give  your  opinion  on  this  case. 

(3)  Is  the  following  instrument  a  negotiable  promissory  note  ? 

Chicago,  April  8,  1908. 
Thirty  days,  after  William  H.  Taft  is  elected  President  of  the  United 
States,  I  promise  to  pay  to  the  order  of  William  J.  Bryan,  Five  Hundred 
Dollars,  at  the  First  National  Bank  of  Chicago  for  value  received. 

(Signed)    Joseph  G.  Cannon. 

Give  reasons  for  your  answer. 

Can  the  payee  collect  this  amount  thirty  days  after  the  stipulated  con- 
tingency occurs?  What  is  that  contingency — the  casting  of  the  popular 
vote,  the  action  of  the  electors  in  the  several  states,  or  the  action  of 
Congress  in  opening  and  canvassing  the  returns?  Explain  why  you 
answer  as  you  do. 

(4)  A  firm,  composed  of  three  members,  was  about  to  dissolve  partner- 
ship and  go  out  of  business.  It  occupied,  and  had  for  many  years, 
premises  which  the  firm  leased  and  did  not  own.  One  of  the  members, 
without  the  knowledge  of  his  co-partners,  obtained  a  lease  of  these 
premises  some  time  prior  to  the  dissolution  of  the  firm,  but  when  it  was 
contemplated,  the  new  lease  to  begin  when  the  old  one  expired,  and  after 
the  dissolution,  sold  the  lease  for  a  large  sum  of  money.  Is  he  under 
any  obligation  to  account  to  his  partners  for  the  profits  thus  realized  as 
if  the  same  were  partnership  property?    Give  reasons  for  your  answer. 

(5)  What  is  understood  by  the  term  "debentures?"  How  do  they 
differ  from  other  securities  or  stock?    If  there  is  any  difference  in  Eng- 

296 


|MI 


C.  P.  A.  Examination  Questions. 

land  and  this  country  in  the  practice  of  issuing  debentures  and  the  usual 
meaning  of  the  term,  state  it. 

(6)  What  is  a  bill  of  exchange?  Is  an  oral  acceptance  of  such  a  bill 
valid  in  Illinois  or  must  it  be  in  writing? 

(7)  Must  the  stock  of  an  Illinois  corporation  be  paid  in  wholly  or 
in  part  before  certificate  of  complete  organization  issues,  and,  if  so,  in 
what  may  such  payment  be  made? 

(8)  What  is  a  surety?  Can  he  exonerate  himself  from  his  contract 
by  showing  that  no  consideration  therefor  moved  to  him ;  that  he  received 
no  benefit  from  its  execution  and  no  part  of  the  consideration  upon  which 
it  was  executed?    If  so,  why?    If  not,  why?    Explain  clearly. 

(9)  Is  a  person,  who  is  a  member  of  two  firms,  under  liability  to 
account  to  the  other  members  of  either  firm  for  profits  which  he  realized 
from  his  efforts  or  investment  in  the  other?  If  not,  why  not?  If  there 
are  circumstances  in  which  he  would  or  might  be  so  liable,  state  them. 

(10)  Where  one  party  is  entitled  to  an  accounting  from  another,  what 
is  the  usual  and  proper  proceeding  in  Illinois  and  in  the  Federal  Courts 
for  securing  such  an  account? 


Practical  Accounting — Part  f. 

(New  York  Examination,  Tuesday,  June  23.  1908 — 

1:15  to  4:15  P.  M..  only.) 

(i)  A  land  company  is  incorporated  with  a  capital  of  $50,000.  It 
purchases  a  tract  of  104  acres  of  land  at  $500  an  acre,  paying  therefor 
$32,000  in  cash  and  giving  capital  stock  for  the  remainder  of  the  con- 
sideration, and  at  the  same  time  giving  a  mortgage  to  a  title  guarantee 
company  to  secure  a  loan  of  $35,000,  which  is  to  be  satisfied  by  partial 
payments  as  lots  are  sold  and  released. 

Obligations  are  incurred  on  book  account  as  follows:  for  organization 
expense  $619;  for  grading  and  paving  $23,400;  for  water  mains  (a  sepa- 
rate enterprise  to  be  reimbursed  by  service  charges  when  ready  for  opera- 
tion) $4,000. 

Direct  expenditures  of  cash  are  made  for  organization  expense  $537; 
for  grading  and  paving  $11,060;  for  water  mains  $1,020;  for  maps  $700; 
for  advertising  $1,200;  for  salaries  and  expenses  $8,679.  Settlements  are 
made  with  creditors  by  cash  $8,784  and  by  capital  stock  issue  $10,000; 
the  remaining  capital  stock  is  issued  for  cash. 

Lots  sold  on  purchase  money  mortgages  $24,857;  instalments  collected 
$9,442 ;  cancelation  of  title  company  mortgage  on  lots  sold  $8,050,  and  pur- 
chase money  mortgages  pledged  for  loan  of  $10,000. 

Interest  paid  to  title  company  $1,849;  interest  received  on  purchase 
money  mortgages  $924.  Inventory  of  lots  unsold,  including  improve- 
ments at  cost  $66,575,  to  which  latter  10%  is  to  be  added  for  apprecia- 
tion of  value.  Maps  on  hand  $500.  Prepare  (a)  cash  summary,  (6) 
skeleton  ledger  accounts,  (c)  profit  and  loss  account,  (rf)  balance  sheet, 
covering  the  transactions  above  stated. 


M 

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297 


Mill 


Pi! 


:i.f 


Accounting  Problems  and  Solutions. 

(2)  A  person  dies,  leaving  a  will  disposing  of  a  personal  estate  that 
is  valued  by  the  appraisers  at  $36,470.  All  but  $209  is  disposed  of  by  the 
executor,  who  realizes  $32,131.  This  together  with  $2,187  of  income 
received  during  the  administration  of  the  estate,  constitutes  the  full  sum 
to  be  accounted  for. 

The  testamentary  and  funeral  expenses  amount  to  $512.  Debts  of  the 
estate  to  the  amount  of  $1,500  are  presented  and  satisfied.  Expenses  of 
$700,  including  trustee's  commissions,  are  paid  and  the  sum  of  $30,000  is 
divided  among  the  heirs.  Prepare  in  customary  form  a  summary  of  the 
executor's  accounting,  and  a  cash  account. 

(3)  Highland  county  undertakes  two  public  improvements,  viz.:  a 
road  estimated  to  cost  $50,000,  and  a  sewer  estimated  to  cost  $40,000. 

The  work  is  to  be  paid  for  out  of  proceeds  of  county  bonds  falling 
due  at  various  dates  and  redeemable  from  assessments  levied  against 
property  presumably  benefitted,  to  the  amount  of  the  actual  cost  of  the 
work  and  incidental  charges  when  these  are  determined. 

Bonds  to  the  above  amounts  are  accordingly  sold,  realizing  a  premium 
of  1%,  which  is  added  to  the  respective  funds;  the  cost  of  the  two 
undertakings  when  completed  is  $50,000  and  $40,500  respectively,  for 
which  assessments  are  accordingly  levied. 

Assessments  are  subsequently  collected  as  follows:  for  roads  $30,200, 
with  accrued  interest  of  $1,310;  for  sewers  $29,400,  with  accrued  interest 
of  $1,250.    The  interest  in  each  case  goes  into  the  related  funds. 

Road  bonds  of  the  par  value  of  $20,000  and  sewer  bonds  of  the  par 
value  of  $15,000  mature  and  are  redeemed. 

Frame  journal  entries,  post  to  ledger  accounts  and  prepare  a  trial  bal- 
ance from  which  the  status  of  the  county  debt  and  of  the  funds  and 
assessments  at  the  conclusion  of  the  above  transactions  can  be  ascer- 
tained and  determined. 


Theory  of  Accounts. 

(New  York  Examination.  Tuesday.  June  23,  1908 — 

9:15  A.  M.  to  12:15  p.  m..  only.) 

(i)  A  manufacturing  concern  having  increased  its  capital  and  invested 
considerable  money  in  new  machinery  and  in  the  construction  of  old 
machinery,  removes  to  a  new  location  and  charges  the  cost  of  moving 
and  the  reconstruction  of  its  old  machinery  to  one  account  termed  "Instal- 
lation." Explain  fully  how  this  account  should  be  treated  in  closing 
the  books  of  the  company  and  give  your  reasons. 

(2)  In  closing  books  how  would  you  value  the  goods  owned  by  your 
client  and  consigned  at  selling  prices  to  customers  of  your  client,  under 
an  agreement  by  which  the  customers  pay  for  the  goods  as  used?  Give 
reasons. 

(3)  Name  seven  kinds  of  ledgers  and  briefly  state  the  use  of  each  kind. 

(4)  Define  cost  accounts  of  a  manufacturing  business  and  state  what 

298 


C,  P.  A.  Examination  Questions. 

information    they    furnish.    Distinguish   between   manufacturing   or    fac- 
tory costs  and  commercial  or  selling  costs. 

(5)  What  method  would  you  recommend  for  recording  the  cash 
receipts  on  the  general  cash  book  of  a  company  operating  10  branch 
houses,  each  depositing  its  daily  receipts  in  a  separate  bank?  Describe  fully. 

(6)  What  are  the  principal  differences  between  a  trial  balance  taken 
before  the  books  are  closed  and  one  taken  directly  after  they  are  closed? 

(7)  Give  the  names  of  the  general  accounts  to  be  used  and  state 
briefly  how  you  would  proceed  to  open  a  set  of  books  for  the  receiver 
of  a  small  manufacturing  concern,  the  court  having  issued  an  order  that 
the  receiver  shall  continue  manufacturing  in  order  to  utilize  to  the  best 
advantage  the  work  in  process  and  the  raw  material. 

(8)  Would  you  consider  it  proper  to  include  as  an  asset  the  fol- 
lowing items :  insurance  premium  unearned,  taxes  paid  in  advance,  adver- 
tising expenses?     Explain  briefly  and  give  reasons. 

(9)  State  how  you  would  proceed  to  analyze  the  accounts  in  a  ledger, 
giving  reasons  for  the  methods  you  would  employ. 

(10)  Describe  a  system  of  bookkeeping  by  which  the  errors  in  a  trial 
balance  may  be  localized. 

(11)  State  briefly  how,  at  the  close  of  the  fiscal  year,  you  would 
proceed  to  determine  the  value,  for  inventory  purposes,  of  the  machinery 
and  tools  of  a  manufacturing  establishment. 

(12)  In  making  up  a  statement  of  profit  and  loss,  where  would  you 
show  (a)  cash  discount  allowed  customers  for  the  prompt  payment  of 
bills,  (b)  cash  discount  deducted  in  payment  of  invoices  by  your  clients? 
Explain  briefly  and  give  reasons. 

(13)  In  closing  the  books  of  a  firm  it  is  found  that  the  accounts 
receivable  include  $5,000  of  worthless  accounts  and  $10,000  of  doubtful 
accounts.  The  firm  decides  to  deduct  from  the  gross  profits  $15,000  for 
these  items.  What  would  you  consider  the  best  method  of  carrying 
these   items   on   the   general   ledger? 

(14)  A  corporation  authorizes  an  issue  of  $1,000,000  of  bonds.  The 
trust  company  issues  and  certifies  $500,000  of  these  bonds  to  December  31, 
1907.  On  this  date  the  company  sells  $200,000  of  bonds,  pledges  $200,000 
as  collateral  security  for  the  payments  of  its  notes  and  has  $100,000  in  the 
treasury.  How  should  this  issue  of  bonds  appear  on  the  balance  sheet 
of  the  corporation  on  December  31,  1907? 

(15)  Write  out  in  detail  the  general  instruction  for  taking  the  inven- 
tory of  raw  materials,  work  in  process  and  finished  goods  of  a  small  com- 
pany manufacturing  automobiles.  Show  the  general  divisions  that  the 
inventory  requires  and  provide  against  errors  in  recording  the  items. 


Auditing. 

(New  York  Examination,  Wednesday,  June  24,  1908 — 

1 :1 5  to  4:15  P.  M.,  only.) 

(i)  In  the  preparation  of  a  manufacturing  and  trading  account  and 
a  balance  sheet,  state  on  what  basis  the  following  assets  should  be  valued : 

299 


i 


if 


J 
it '' 


I 


1  1 


Accounting  Problems  and  Solutions. 

(a)  Raw  materials. 

(b)  Product  in  process  of  manufacture. 

(c)  Manufactured  product. 

(d)  Bills  receivable. 

(e)  Accounts  receivable. 
Give  fully  your  reasons. 

(2)  In  preparing  a  statement  of  the  earnings  of  a  business,  cover- 
ing a  period  of  five  years,  how,  in  order  to  determine  what  the  average 
earning  capacity  of  said  business  has  been,  should  the  expenditure  for 
interest  paid  on  bills  payable  and  loans,  and  on  accounts  payable  be 
considered  ? 

(3)  An  examination  of  the  minutes  and  other  records  of  the  books 
of  a  corporation,  preceding  an  audit,  discloses  that  a  revaluation  of  its 
buildings,  plant,  and  machinery,  had  been  made  by  expert  appraisers  called 
in  for  the  purpose.  The  report  of  these  appraisers  states  that  the  values 
as  determined  by  them  were  greater  than  those  shown  on  the  books. 
Should  such  increased  value  be  entered  on  the  books  of  the  corporation? 
What  entries  should  be  made  to  show  this  in  the  profit  and  loss  account 
and  balance  sheet? 

(4)  What  kind  of  expenditures  of  a  manufacturing  business  would 
you  classify  as  being  in  the  nature  of  maintenance  and  repairs  of  equip- 
ment machinery,  and  plant,  and  what  would  constitute  actual  better- 
ments? How  should  such  expenditures  be  dealt  with  on  the  books  and 
shown  in  the  profit  and  loss  statement,  and  on  the  balance  sheet? 

(5)  Define  and  differentiate  an  audit  conducted  for  the  purpose  of 
reviewing  past  transactions  and  establishing  the  significance  thereof  and 
an  audit  precedent  to  determining  the  verity  of  a  bill  or  of  a  claim.  Give 
a  brief  outline  of  the  procedure  in  each  case. 

(6)  State  (a)  for  what  class  of  assets  provision  for  depreciati.vn 
should  be  made,  (b)  what  would  constitute  an  adequate  rate  for  depre- 
ciation on  buildings  and  on  plant  and  machinery  respectively.  Give 
reasons. 

(7)  How  should  a  leasehold  be  treated  in  the  accounts  of  a  com- 
pany and  how  should  it  be  shown  on  the  balance  sheet? 

(8)  Give  a  brief  description  of  the  books  of  a  corporation  that  should 
be  examined  and  inspected  by  the  auditor  and  state  the  reasons  why  such 
examination  or  inspection  should  be  made. 

(9)  What  is  the  value  of  a  bank  pass  book  for  the  purpose  of  an 
audit?  How  would  you  reconcile  the  pass  book  balance  with  the  cash 
book  balance? 

(10)  In  auditing  an  account  the  auditor  finds  that  Robert  Brown  had 
bought  a  bill  of  goods  amounting  to  $500,  payable  on  August  loth,  less 
2%.    He  had.  however,  made  payments  thereon  as  follows: 

June      2        $100 

"       IS  100 

July       3         100 

300 


C.  P.  A.  Examination  Questions, 

On  what  date  would  he  be  required  to  make  payment  of  the  remain- 
ing $200  to  entitle  him  to  the  2%  discount  under  the  original  terms  of 
sale? 

(11)  What  generally  constitutes  capital  expenditure?  What  expendi- 
tures are  properly  chargeable  against  revenue?  Explain  and  give  illus- 
trations in  each  case. 

(12)  The  accounts  of  a  steel  and  iron  manufacturing  company  show 
large  additions  to  plant  and  machinery.  It  is  found  that  these  charge* 
include  considerable  amounts  from  pay  rolls.  In  the  absence  of  specific 
explanations  as  to  the  pay  roll  element,  what  method  should  be  employed 
by  the  auditor  to  determine  the  accuracy  and  the  propriety  of  these 
charges  ? 

(13)  If  the  auditor  has  not  verified  or  had  opportunity  to  verify  the 
actual  cash  on  hand  at  the  date  of  the  balance  sheet,  what  should  be  his 
procedure  to  prove  the  correctness  of  the  balance  sheet  as  stated,  before 
giving  his  certificate? 

(14)  In  auditing  the  accounts  of  a  railway  company  how  should  the 
auditor  determine  whether  or  not  the  net  earnings  are  correctly  stated? 

(15)  What  test  of  the  prime  cost  of  manufactured  goods  should  be 
made  to  guard  against  loss  of  raw  material  through  theft  by  employees? 


Practical  Accounting — Part.  II. 

(New  York  Examination.  Wednesday,  June  24.  1 908 — 

9:15  A.  M.  to  12:15  P.  M..  only.) 

(4)  The  trustees  of  an  estate  of  $250,000  make  the  following  invest- 
ments and  collect  the  income: 

Purchases. 
Feb.     2.     100  shares  D.  Q.  stock,  par  $100  each,  at  $109.50. 
Mar.    5.    10  S.  P.  bonds,  maturing  1950,  $1,000  each,  6%  Jan.  i  and 

July  I,  at  $1,010  and  accrued  interest. 
Apr.  10.    Bond    and   mortgage    for    $5,000,    maturing    1912;    interest 

5%  Apr.  I  and  Oct.  i. 
Oct.     6.    10  S.  P.  bonds,  maturing  1950,  $1,000  each,  6%  Jan.  i 

July  I,  at  $1,020  and  accrued  interest. 

Sales. 

Oct.    5.    100  shares  of  D.  Q.  stock  par  $100  each,  at  $110. 

The  D.  Q.  stock  pays  quarterly  dividends  as  follows: 

Apr.    I,    iJ4%;  July   i,    1^%;    Oct.    i,    2%.    These    dividends 
received  respectively  on  April  3,  July  5,  and  October  3. 

The  interest  on  S.  P.  bonds  is  received  July  2  and  the  interest  on  the 
bond  and  mortgage  for  5  months  and  20  days  is  received  on  the  date 
due. 

On  April  10  the  trustees  borrow  from  the  bank  $1,100  on  collateral 
note  and  repay  the  loan  Oct.  10,  with  interest  at  6%  per  annum. 


and 


are 


I  I 


301 


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H 


Accounting  Problems  and  Solutions, 

Prepare  cash  account,  principal  and  income  accounts  of  each  securitv 
interest    and  dividend  account  and  trial  balance  as  of  Oct    lo  '^' 

to  the  value  of  $?cl''"  ^^"^^f '"ent.  under  date  of  April  4,  merchandise 
to  the  value  of  $1,500,  paymg  $15  cartage  and  $6  insurance. 

fr/  nTr  K  ^^"^If  "^^"t  April  20,  paying  freight  $70  and  cartage 

$12     He  subsequently  disposes  of  the  merchandise  by  sales  as  follow! 
April  30    $400;   May  30,  $8(X);  June  30.  $600,  on  which  latte     he  plys 

ITI  A     \  ""'u    "''*'""'  '"^^'  ^^*^  remittance  of  net  pro- 

ceeds  to  A,  who  receives  them  July  10. 

Prepare   shipment  account  as  preparing  on   A's   ledger   and   consign- 
ment account  as   appearing  on   B's  ledger.  consign 

(6)  A,  the  party  of  the  first  part,  enters,  March  i,  on  the  perform- 
ance of  a  contract  for  $50,000,  payable  in  two  instalments  of  $25,L  each 
the  first  of  which  is  due  on  the  completion  of  a  specific  part  of  t^  4ork 
but  subject  to  10%  to  be  retained  by  the  party  of  the  second  panls 
security  for  the  continuation  of  the  undertaking;  the  second,  tog  the 
with  he  security  retained  as  aforesaid,  is  to  be  paid  on  final  ;cceptance 
of  the  completed  work. 

■     V'^'  f  "T^^l  °*  ^'°°°  ^"^'^^^^^  *°'"  P^y"™*  °f  'abor.  which  prove, 
nsufficent.    He  therefore  takes  in  as  associates  on  April  i   B.  who  col- 
nbutes  $3,000  and  Q  who  contributes  $,,ooo,  B  and  C  t;  share  poL 

ap  ta    atT^       "'        ^'  ""  ^'^  ^-P''='-'='y.  -^  to  receive  interest  on 
capital  at  0%  per  annum. 

The  first  instalment  on  the  contract  falls  due  and  is  paid  on  May  i 
at  wh.ch  date  there  had  been  expended  by  the  contractors  for  labored 

on  c'redt  .^hT'  "'  "'"^f  ""^  '"  '"'''"'''  -"  -PP"«  ^-nis^d 
$1,,^  of  \  .  n  TT"  '"'^  ^'''  outstanding  to  .the  amount  of 
mon^'  *''^°°  "'  ^°'**'"'  '""'"<*  *'°'"  *^  instalment 

and°r.jr'"f,!  °*  '«'  '^"*  instalment,  B  and  C  withdraw  their  capital 
and  reahze  the  profits  earned  at  the  completion  of  the  first  stage  of  the 

mu  ually  conceded  that  a  further  outlay  of  $26,158  will  be  sufficient  to 
iimsh  the  work  and  cover  all  reasonable  contingencies 

Show  by  skeleton  ledger  accounts  the  cash  payable  by  A  to  B  and  C 
respectively,  on  their  withdrawal  from  their  partnership,  and  state  the 
resources  and  obligations  that  remain  to  A  on  entering  on  the  second 
part  of  the  work.  *  secona 


Commercial  Law. 

(New  York  Examination,  Thursday,  June  25.  I90&— 

9:I5a.  M.  to  12:15  p.m.,  only.) 


C.  P.  A.  Examination  Questions. 

u  ,i^,-  E^^^r  "^^^^  circumstances  may  the  directors  of  a  corporation  be 
held  liable  for  dividends  paid  ?  Explain  fully  and  state  to  whom  the  direct- 
ors are  liable. 

(3)  May  a  broker  for  a  vendor  act  also  as  a  broker  for  the  vendee  ana 
collect  commission  from  both  ?    Answer  fully  and  give  reasons. 

(4)  What  is  the  statute  of  limitations  and  on  what  policy  is  it 
founded?  Explain  fully  and  mention  three  ways  that  will  prevent  the 
statute  from  running  against  an  ordinary  debt. 

(5)  Explain  what  is  meant  by  "stoppage  in  transit"  and  state  when 
and  how  long  the  right  may  be  exercised. 

(6)  What  are  clearing  house  certificates  and  for  what  purpose  are 
they  used?    Are  certified  checks  legal  tender?    Define  legal  tender 

(7)  Distinguish  between  personal  property  and  real  property.  Men- 
tion nve  distinct  classes  of  personal  property. 

(8)  Would  a  railway  corporation  be  liable  for  negligence  to  the  estate 
of  a  decedent  for  injuries  to  the  person  of  the  decedent  before  his  death 
though  the  injury  did  not  in  any  way  contribute  to  the  death  of  the 
decedent?    Give  reasons. 

(9)  Explain  generally  the  nature  of  a  mortgage  bond  of  a  corporation 
and  state  the  steps  necessary  for  the  cancelation  of  the  bonds  and 
mortgage. 

( 10)  State  the  procedure  necessary  in  New  York  State  for  dissolving 
a  corporation. 

(11)  In  what  cases  in  New  York  State  may  the  property  of  a  defend- 
ant be  attached  in  a  suit  for  the  collection  of  a  debt? 

(12)  What  constitutes  bankruptcy?  State  what  law  governs  in  such 
cases  and  explain  how  that  law  obtains  its  authority. 

(13)  What  are  the  powers  and  the  duties  of  surviving  partners  of  a 
business  ? 

(14)  May  one  of  the  parties  to  a  contract  assign  his  rights  or  liabilities 
in  the  contract  to  a  third  party?  Explain  fully  and  state  the  rights 
and  the  obligations  of  all  parties. 

(15)  In  cases  of  payments  on  account  of  a  number  of  diflFerent  trans- 
actions between  a  debtor  and  a  creditor,  may  the  debtor  state  on  which 
transaction  the  payment  shall  be  applied,  and  if  no  attempt  is  made  by 
the  debtor  to  apply  the  payment  to  a  particular  transaction,  may  the 
creditor  apply  the  payment  to  a  specific  transaction  ?    Explain  fully 


Auditing. 
(Michigan  Examination,  Friday  Jmie  26.  1908 

8:30  A.  M.  to  12:00  noon.) 

(Time  allowed,  3^  hours.) 
75  Credits  out  of  a  possible  100  necessary  to  pass, 
(i)  What  is  an  auditor's  duty  with   regard  to  the   following  items 
appearing  upon   a   balance   sheet?    Imprest   cash,  notes   receivable,   cus- 

303 


IP'IM 

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'IJI 


Accounting  Problems  and  Solutions. 

tomcr's  accounts,  sundry  debtors,  mortgages  payable,  certificates  of  deposit, 
patents,  goodwill,  preliminary  (or  organization)  expenses,  stocks  and 
bonds,  purchase  creditors'  accounts  and   sundry  creditors. 

(2)  What  do  you  understand  by  the  term  "secret  or  hidden 
reserves "  ?  Mention  four  (4)  bona  fide  uses  of  a  secret  reserve  and 
state  your  opinion  as  to  the  propriety  or  otherwise  of  the  creation  of  such 
"  reserves/'  giving  reasons. 

(3)  The  J.  B.  &  B.  Coal  Mining  Company  has  acquired  a  leasehold 
right  to  a  certain  area  of  coal,  and  also  owns  a  freehold  coal.  What 
would  you  require  as  auditor,  to  satisfy  yourself  that  revenue  was  bear- 
ing its  proper  annual  charge  in  respect  of  the  coal  mined? 

(4)  Chart  the  following  accounts  of  a  street  railway  company  under 
their  proper  classification  and  logical  order,  as  to  assets  (active  fixed,  and 
passive),  liabilities  (funded,  floating,  reserves,  and  capital),  expenses 
(transportation,  including  operating  of  power  plant  and  car  service), 
(general,  including  administrative,  emergencies,  and  fixed  charges), 
(maintenance,  including  repairs  and  depreciation)  and  revenue,  from 
operation  and   (b)   from  other  sources. 

Organization  expenses,  preliminary  engineering  and  superintendence, 
right  of  way,  track  and  roadway,  notes  payable,  cash  in  office,  profit  and 
loss,  power  plant  wages,  salaries  of  general  officers,  damages,  taxes, 
electric  line,  investment  real  estate,  debentures,  vouchers  payable,  stocks 
and  bonds  of  other  companies,  hired  power,  wages  of  conductors  and 
motormen,  car  service  supplies,  insurance,  first  mortgage  bonds,  ninth 
national  bank,  cleaning  and  sanding  track,  printing  and  stationery,  legal  ex- 
penses, rent  of  land  and  buildings,  notes  receivable,  shop  tools  and  machin- 
ery, passenger  receipts,  roHing  equipment,  dividends,  material  and  supplies, 
freight  receipts,  interest  on  deposits,  track  rentals  common  stock,  sinking 
funds,  goodwill,  mail  receipts,  sale  of  power  dividends  on  securities, 
salaries  of  clerks,  removal  of  snow  and  ice,  advertising  and  attractions, 
storeroom  expenses,  steam  plant,  items  in  suspense,  impairment  and  sur- 
plus, first  preferred  stock,  repairs  to  equipment,  reserves,  accounts  receiv- 
able, second  preferred  stock,  second  mortgage  bonds,  fuel  and  water  for 
power  buildings,  and  fixtures. 

(5)  A  $100.00  bond  is  issued  at  $115.00  and  is  payable  as  to  $35.00 
on  allotment  ,and  to  the  remaining  $80.00,  in  four  equal  instalments  at 
intervals  of  two  months,  the  first  instalment  being  due  two  months  after 
the  allotment.  If  after  a  year  a  dividend  of  $6.00  is  paid  on  each  bond, 
what  is  the  average  rate  of  interest  on  the  investment  for  the  whole  year? 

(6)  John  Adams,  a  capitalist,  contemplates  purchasing  the  stock  of 
the  American  Grain  Exporting  Company,  a  corporation  organized  with 
a  capital  of  $200,000.00,  divided  into  1,000  shares  preferred  stock  and  1,000 
shares  common  stock,  par  value  $100.00  each,  six  per  cent.  (6%)  divi- 
dends, payable  upon  the  preferred  stock  before  any  dividends  are  declared 
upon  the  common  stock. 

This  stock  has  been  offered  to  Mr.  Adams  at  $60.00  per  share  for  the 
preferred  and  $40.00  per  share  for  the  common. 


C.  p.  A.  Examination  Questions. 

You  are  requested  to  audit  the  books  of  the  company  and  give  your 
opinion  as  to  the  value  of  the  stock.  You  find  the  following  accounts 
to  be  correct,  covering  a  period  of  one  year. 

i^asn    $000  00 

Accounts  receivable: 

^°^,/ : $15,000.00 

Doubtful    4,000.00 

„,    ?^"  , •  • 6,000.00        25,000.00 

Plant  and  machmery   75,000.00 

Horse   and   wagons    400000 

Merchandise— Invty 29'ooo.'oo 

Goodwill    50,000  00 

Furniture  and  fixtures   2*000  00 

^Pe"ses    3;ooo'.oo 

^^^^^    15,000.00 

•  ••■••••■•••.«•..........,.  '?2C  oon  Oft 

Claims  and   rebates    V,\  sWoo 

Ordmary    repairs    9,000.00 

?^^^f    ; $260,400.00 

Mortgage   on   plant    25,000.00 

Accounts   payable    42,000.00 

Surplus    18  £500  00 

Capital   stock    2oo;ooo:oo 

'^°*^^^    $545,900.00    $545,900.00 

Inventory  submitted  $129,000.00.  The  company  started  business  six 
years  ago  and  built  the  plant  and  machinery  and  purchased  the  property 
pertaining  to  fixed  capital.  Write  the  report,  commenting  upon  the  advis- 
ability of  the  purchase  and  submit  profit  and  loss  statement  and  balance 
sheet,  after  closing  books. 

(7)  The  cashier  of  a  firm  has  disappeared.  The  cash  book  is  left 
written  up  and  balanced  off,  the  custom  being  to  pay  any  cash  balance  into 
the  bank  each  day.  What  course  would  you  take  to  ascertain  whether 
there  were  any  defalcations,  if  you  were  called  upon  to  audit? 

(8)  You  are  asked  by  a  client  how  to  treat  inventories  at  the  time 
of  closing  the  books,  e.  g.,  should  they  be  figured  at  cost  or  market  price, 
or  otherwise  ?  Is  the  common,  old-fashioned  method  of  adding  the  inven- 
tory of  merchandise  on  hand,  to  the  credit  side  of  the  merchandise 
account  before  closing  the  books,  theoretically  correct?     Explain  fully. 

(9)  What  evidence  would  you  require  as  to  the  validity  of  expenditure 
in  respect  of  wages  paid  in  a  large  manufacturing  plant,  and  as  the  value 
of  the  inventories  of  stock  on  hand  credited  to  loss  and  gain?  It  is 
assumed  that  the  above  manufacturing  concern  kept  a  complete  cost 
system,  which  was  an  integral  part  of  the  general  books. 

(10)  The  market  value  of  the  investments  of  a  trust  company  has 
fallen  considerably,  while  the  company  has  earned  enough  income  to  pay 
the  usual  dividend.  How  should  you  deal  with  this  position  of  affairs 
in  auditing  the  annual  accounts? 

305 


li 


Accounting  Problems  and  Solutions, 
Theory  of  Accounts. 

(Michigan  Examination,  Friday  June  26,  1 908 — 
2:00  p.  M.  to  5:30  p.  m.) 

(Time  allowed,  3H  hours.) 

(i)  Do  unsold  bonds  of  a  railroad  company  constitue  a  liability? 
If  they  do,  under  what  account  would  they  appear  in  the  ledger?  Does 
unsubscribed  stock  in  a  corporation  constitute  a  liability?  If  it  does, 
under  what  account  would  it  appear  in  a  ledger? 

(2)  State  in  what  respects  (a)  the  rights  and  (b)  the  duties  of  an 
executor  and  an  administrator  differ,  (c)  how  an  executor  is  appointed, 
(rf)in  what  order  should  an  executor  pay  the  debts  of  an  estate  and  (e) 
what  form  of  receipt  should  he  require  for  any  payments  made  by  him. 

(3)  Name  five  (5)  classes  of  bonds,  describing  briefly  each  class  with 
regard  to  issue,  purpose,  redemption,  etc. 

(4)  Should  a  manufacturing  establishment  invoice  its  sales  to  its 
branch  houses  at  cost  or  at  a  profit?  What  would  be  the  advantages  or 
disadvantages  for  either  the  factory  or  the  branches  by  either  of  these 
methods?    Explain  fully. 

(5)  Give  your  opinion  regarding  the  following,  and  reasons:  (a) 
should  ordinary  discount  of  2^%  a  month  be  considered  as  a  trade 
or  a  time  discount?  (b)  Is  it  proper  to  take  credit  in  the  balance  sheet 
for  discounts  on  purchase  creditors  accounts?  (c)  Whether  in  arriving 
at  a  proper  amount  as  a  reserve  for  bad  debts,  the  length  of  credit  should 
be  taken  into  account,  and  why? 

(6)  What  would  be  a  fair  allowance  for  depreciation  per  annum  oa 
the  following  plant  assets: 

Real  estate,  including  fences,  sidewalks,  tracks,  etc. 

Buildings  and  building  fixtures — fireproof  construction. 

Factory  equipment,  including  benches,  cupboards,  etc. 

Machinery,  both  iron  and  woodworking. 

Fixed  tools,  both  iron  and  woodworking. 

Lx)ose  tools,  both  iron  and  woodworking. 

Power  plant. 

Electric  wiring  and  apparatus— including  dynamos,  motors,  etc 

Sprinkler  system  and  fire  equipment. 

Blower  system. 

Office  furniture  and  fixtures,  including  typewriters,  adding  machines, 
graphophones,  multigraphs,  etc. 

Horses  and  mules. 

Wagons,  harness,  and  trappings. 

Patterns — iron  and  wood — and  drawings. 

State  your  opinion — for  or  against— the  necessity  of  providing  for 
depreciation  in  a  manufacturing  business. 

306 


C.  P.  A.  Examination  Questions. 

(7)  Define  the  following  terms:  prime  cost,  indirect  charges  (on-cost) 
shop  cost,  cost  of  production,  commercial  expenses,  stores,  stock,  store- 
room warehouse  freight— in,  and  freight — out. 

(8)  The  trial  balance  and  schedules  of  debtors  and  creditors  in  the 
books  of  a  manufacturing  concern  disclose: 

(o)  Debts  owing  to  and  by  the  same  firms  among  the  Drs.  and  Crs. 
(&)  Money  owing  by  the  concern  to  a  debtor  for  calls  unpaid  and 
m  arrear. 

(c)  Money  owing  by  the  concern  to  the  acceptor  of  a  note  receivable, 
discounted  by  the  concern's  bank. 

(d)  Money  owing  to  the  concern  by  the  drawer  of  a  note  payable 
accepted  by  the  concern. 

What  considerations  guide  you  in  deciding  in  each  case  whether  these 
sums  should  respectively  be  set-off  and  excluded  from  the  balance  sheet 
or  not  (assuming  for  the  purpose  of  this  question  that  the  sums  are  all 
equal  in  amount)  and  what  is  your  decision  in  each  case. 

(9)  Explain  what  is  meant  by  suspense,  reserve,  prepaid  and  accrued 
accounts,  and  give  examples  of  each,  showing  proper  classification  on  the 
debit  and  credit  sides  of  a  balance  sheet. 

(10)  Differentiate  between  consignments,  adventures,  and  joint 
accounts.  How  should  consignments  received,  to  be  realized  for  and  on 
behalf  of  another,  be  best  treated?  How  should  the  managing  partner  of 
a  joint  adventure  treat  the  same  in  his  books?     Illustrate. 


Commercial  Law. 

(Michigan  Examination,  Saturday,  June  27,  1908 — 
8:30  A.  M.  to  12:00  noon.) 

(Time  allowed,  3H  hours.) 

(i)  Define  a  contract,  (b)  Classify  contracts  as  to  grade,  (c)  What 
is  a  condition  precedent  in  the  law  of  contracts?  (rf)What  is  a  condition 
subsequent?    (e)  What  is  the  advantage  of  a  formal  contract? 

(2)  State  the  distinction  between  business  paper  and  accommodation 
paper,  (b)  When  does  commercial  paper  obtain  legal  inception?  (c) 
What  is  a  contract  of  indorsement?  (d)  Name  and  give  examples  of  the 
different  kinds  of  indorsement. 

(3)  What  is  the  liability  of  the  parties  to  a  certified  check.  Give  rea- 
sons for  your  answer,  (b)  What  is  the  effect  of  an  alteration  of  a 
negotiable  instrument. 

(4)  Name  the  different  varieties  of  negotiable  and  quasi-negotiable 
instruments.  When  may  presentment  of  a  negotiable  instrument  be  dis- 
pensed with  and  yet  the  secondary  party  be  charged  for  the  claim  due. 

(5)  How  are  foreign  corporations  authorized  to  transact  business  in 
Michigan?  (b)  and  what  franchise  fee  is  required  from  them?     (c)  How 

307 


■:l      ■! 


ill. 


Accounting  Problems  and  Solutions. 

is  a  corporation  created  in  Michigan?  (d)  and  how  many  incorporators 
are  required  by  the  law?  {e)  What  is  the  minimum  and  maximum 
authorized  capital  at  which  corporations  may  capitalize  in  Michigan? 
(/)  Is  the  minimum  and  maximum  authorized  capital  of  all  classes  of 
companies  the  same?  Give  the  figures  in  answers,  (g)  How  may  the 
dissolution  of  a  corporation  be  effected,  and  (/t)  for  what  particular 
reason  would  a  corporation's  charter  be  forfeited? 

(6)  Define  agency,  {h)  Name  the  classes  of  agents,  (c)  Does  a 
note  made  payable  at  the  Home  Savings'  Bank  make  the  bank  the 
agent  of  the  owner?  Give  reasons,  (rf)  Name  the  requisities  of  agency. 
{e)  What  is  meant  by  ratification? 

(7)  What  is  the  object  of  passing  bankrupt  laws?  (6)  At  the  first 
meeting  of  creditors  in  the  bankruptcy  of  Smith,  all  of  the  creditors,  who 
had  proved  their  claims,  voted  for  Jones,  as  trustee.  To  this  the  bank- 
rupt Smith  objected,  on  the  ground  that  Jones  was  not  competent,  and 
furthermore,  being  his  personal  enemy,  would  act  maliciously  towards 
him.  The  referee,  thereupon,  disapproved  of  Jones  and  appointed  another 
trustee.  Can  a  motion  be  made  to  set  aside  this  appointment?  On  what 
grounds  ?     Explain   fully. 

(8)  An  insurance  company  fails,  and  can  pay  but  six  per  cent.  (6%) 
of  its  liabilities.  Some  of  its  risks  are  reinsured.  Is  the  reinsurer  liable 
for  the  whole  amount  insured  by  it,  or  for  the  amount  which  the  original 
insurer  pays?    Answer  fully  and  give  reasons. 

{h)  What  is  the  meaning  of  an  eighty  per  cent.  (80%)  clause  in  a 
fire  insurance  contract  or  policy,  and  (c)  what  would  be  the  cash  settle- 
ment by  the  insurance  company  in  case  the  property  insured  inventoried 
at  the  time  of  fire  $150,000.00,  but  was  insured  for  only  $100,000.00? 
{d)  and  what  would  be  the  settlement  if  the  property  insured  inventoried 
only  $75,000.00  but  was  insured  for  $100,000.00 

(9)  Allen  Brothers  being  creditors  of  Smith,  who  is  a  partner  in  a 
grocery  firm,  recover  a  judgment  for  $25.00  against  Smith  and  through 
the  sheriff  seize  the  entire  firm  assets  of  $25,000.00.  After  the  seizure, 
but  before  the  sale  took  place,  a  firm  creditor  named  Thomas  levies  on 
the  same  property  on  a  judgment  of  $5,000.00  against  the  firm.  Assuming 
that  the  property  is  sold,  which  judgment  must  be  paid  first  and  why? 

(10)  What  is  a  bill  of  lading?  (6)  Give  the  usual  form  of  a  bill  of 
lading,  (c)  What  objection  is  there  to  signing  bills  of  lading  in  tripli- 
cate ? 

Practical  Accounting. 

(Michigan  Examination,  Saturday,  June  27,  1908 — 

1 :30  P.  M.  to  6:00  P.  M.) 

(Time  allowed,  4^  hours.) 

(i  and  2)  The  following  figures  are  taken  from  the  books  of  the  Fair- 
view  Manufacturing  Co.,  of  New  York  City,  on  the  31st  of  December, 

1907: 

308 


■  C.  P,  A.  Examination  Questions. 

Inventory  of  finished  goods    (Jan.   i) $^684«;7 

Inventory  of  raw  material  (Jan.  i )    ii!3^;70 

Purchases    of   raw   materials 62,519.85 

§^^^^    * 217,387.42 

&.:::::::::::::::::::::::::::::::::::::;::;:;••• '^^^-^ 

Discounts  received  on  purchases '  ^75: 60 

Discounts  allowed  on  sales 186^6 

Power,  light  and  heat   .* R^mJ^^. 

Light  and  heat  for  office  168*0^ 

Repairs  "   ' 

Packing .:...:::: 2^'^ 

Factory  expense  :;;;  '    '^^ 

General  expense t^-innn 

Factory  insurance .....';;:;:::;  loco^ 

General  insurance   V^o  oo 

Machinery  and  plant  ..,,', t^  (cnnn 

^^"^^^  .". 2,600.00 

Commissions    7  642  oo 

Office  salaries ;:;:;;;;  g]^^'^ 

Salesmen  salaries   lo-^ooo 

Interest  on  loans  .' *440  00 

Loans  payable  ......,....[''  22000*00 

Discount   lost    ; ?^'^ 

Notes  receivable  ..    ;;;;  130.000:00 

Notes   receivable,   discounted    800000 

Notes  payable  '.'.'.'.'.'.'.  lo^oo'oo 

Accounts   receivable    loi  026'oo 

Accounts   payable    '.I'.'.'.'.'.'.]'.  30020*00 

Office  furniture    I'loo'oo 

Furniture  and  fixtures   1*950  00 

Cash   on    hand i'82«; 00 

Cash  in  banks  !!..!!...*..'.*!  26467 00 

Returned    sales    ....,..,  '27600 

Capital 200  000  00 

Reserve  for  depreciations  ^  2^5  08 

Reserve  for  bad  debts ...'...'.  572700 

Freight  and  cartage  inward   ....*.*.*.'.*.*  '727  00 

Stable  expenses   .,.,.[  2 75000 

Horses,  wagons  and  harnesses './.'.',  8*500 00 

Postage  and  expressage ...'.'..'.  i  250  00 

Superintendence   -j*enn  no 

Taxes  o^'^ 

Goodwill   ,,?5o.oo 

C^.       4.-  *  .  .* 10,000.00 

ldv:rSg=:"'..r""^ j'f>~ 

-■^-p-  ('^) .•■.■.■■.■.■.■:.•.■.•.•:.•::.•::::::::::::::  6^:^^ 

Vou  are  requested  (a)  to  prepare  from  them  a  trial  balance,  arranged 
m  systematic  order  as  to  balance  sheet  accounts,  assets  and  liabilities, 
and  loss  and  gain  accounts,  expenses  and  revenues,  the  expenses  divided 
between  commercial  and  manufacturing,  so  as  to  facilitate  the  prepara- 
tion of  financial  or  business  statements;  (b)  to  draft  journal  entries  for 
closing  the  books;  (c)  to  certify  your  results  shown  in  (c)  by  a  balance 
sheet, 

309 


i 


md! 


ffjis  ■■!'! 


Accounting  Problems  and  Solutions, 


C.  P.  A.  Examination  Questions. 


IB 


111 


if 


a.'  :■! 


Notations:  The  following  items  are  to  be  taken  into  consideration 
before  preparing  the  statement  asked  for: 

(i  and  2)  Inventories: 

Raw  materials    $16,250.00 

j  Finished   goods    9,386.00 

I  Tools    2,000.00 

I  Office  furniture   1,000.00 

I  Furniture  and  fixtures   1,500.00 

Stationery   and   printing    300.00 

Allow  for  depreciations: 

On  machinery  5%. 

On  horses,  wagons,  and  harness  10%. 

Reserve  for  bad  debts  3%  on  accounts  receivable  only. 

The  item  of  rent  $19,500,  is  to  be  apportioned  as  follows:  53%  for 
factory,  22%  for  salesrooms,  and  25%  for  office. 

The  item  of  superintendence  $3,500,  is  to  be  divided  3-5  to  factory  and 
2-5  to  general  expense. 

(3)  The  Western  Grain  Co.  has  this  day  been  incorporated  under  the 
laws  of  this  state  by  the  following  incorporators:  C.  H.  Benton,  J.  W. 
Walters,  F.  Rowland,  and  A.  B.  Miller,  all  of  this  city,  with  an  author- 
ized capital  of  $25,000.00,  divided  into  250  shares  of  $100,00  each. 

The  purpose  of  this  corporatioii  is  to  buy  and  sell  all  kinds  of  grain, 
and  the  subscriptions  to  the  stock  of  the  company  are  as  follows: 

C.  H.  Benton,  60  shares;  J.  W.  Walters,  60  shares;  F.  Rowland,,  100 
shares,  and  A.  B.  Miller,  30  shares. 

Pursuant  to  an  arrangement  between  the  firms  of  Benton  &  Walters 
and  F.  Rowland,  and  the  Western  Grain  Co.,  the  former  two  individual 
concerns  agree  to  sell  to  the  latter  all  their  assets  consisting  of  stock 
of  merchandise,  real  estate,  accounts,  and  notes  receivable,  goodwill,  etc, 
etc.,  in  consideration  of  the  assumption  by  the  Western  Grain  Co.  of  all 
the  liabilities  of  the  two  individual  concerns  as  well  as  for  the  payment 
in  capital  stock  of  the  company  for  the  balance  which  the  assets  may 
exceed  the  liabilities.  The  balance  sheet  of  each  individual  concern, 
which  is  taken  as  exhibiting  the  exact  value  of  each  plant,  is  as  follows : 


310 


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Accounting  Problems  and  Solutions, 


I!  ' 


Hi 


II 


The  goodwill  of  Benton  and  Walters  is  valued  at  $1,500.00  while  that  of 
F.  Rowland  is  valued  at  $2,000.00. 

To  enable  the  corporation  to  carry  out  this  agreement  the  original 
subscriptions  of  Benton,  Walters  and  Rowland,  are  therefore  amended  as 
follows:  C.  H.  Benton  subscribing  20  shares,  Walters  20  shares,  and 
Rowland  27  shares.  A.  B.  Miller  pays  in  cash  for  his  subscription, 
and  Benton,  Walters,  and  Rowland  donate  each  5  shares  of 
the  capital  stock  of  the  company  to  provide  a  reserve  for  contingencies. 

Draft  the  necessary  journal  entries  for  the  opening  of  the  corpora- 
tion books  and  all  of  the  other  facts  mentioned  above,  and  create  the 
ledger  accounts. 

(4)  A.  Wells,  a  manufacturer  of  novelties,  is  joined  by  I.  M.  Anxious 
in  partnership  upon  the  following  terms: 

A.  Wells  is  to  receive  a  monthly  salary  of  $100  for  the  first  year, 
which  shall  be  a  first  charge  upon  the  profit,  after  providing  for  the  usual 
business  expenses,  and  before  reckoning  3%  upon  the  partner's  capital. 
In  the  event  of  such  profit  during  the  first  year,  or  any  subsequent  year, 
not  exceeding  6%  of  the  total  capital  (after  payment  of  the  salary"), 
this  salary  shall  be  reduced  to  $75.00  per  month  the  following  year,  and 
remain  so  until  the  yearly  profit  advances  to  more  than  6%,  when  such 
salary  shall  return  to  $100.00,  commencing  the  year  succeeding  the  one 
showing  the  required  increase  of  profit.  Should  the  profit  in  any  one 
year  amount  to  more  than  10%  upon  capital,  A.  Wells  shall  be  entitled 
(in  addition  to  the  salary  he  has  received  for  that  year)  to  a  bonus  of 
33Mj%  upon  any  sum  in  excess  up  to  $1,500  and  25%  upon  any  further 
excess  and  his  bonus  shall  be  a  charge  against  profit,  before  alloting 
the  interest  at  3%  upon  capital.  Any  profit  then  remaining  shall  equally 
be  divided.  From  the  following  particulars  construct  separate  capital 
accounts  for  partners  for  five  years.  Starting  capital :  A.  Wells  $6,000.00 
I.  M.  Anxious  $5,000.00 

Profit  before  deducting  salary,  interest,  or  bonus: 

1st  Year  $1,750.00 

2d      "  1,800.00 

3d      "  4,250.00 

4th     "  5,000.00 

5th     "  5,500.00 

No  drawings  on  account.    Distribution  of  profits  when  ascertained. 

(5)  James  Buck  died  March  i,  1908,  leaving  an  estate,  and  in  his 
last  will  made  a  public  accountant  his  executor. 

The  will  provided  the  following : : 

Legacies  of  $3,500.00  each  to  the  testator's  two  brothers. 

A  legacy  of  $5,000.00  to  the  testator's  sister. 

A  legacy  of  $2,500.00  to  the  testator's  nephew. 

The  residuary  estate  should  go  to  the  testator's  wife,  two  sons,  and 
three  daughters  in  the  following  proportions:  2-5  to  the  wife,  1-5  to  the 
eldest  son,  and  i-io  each  to  the  second  son  and  daughters,  respectively. 

312 


m 


C.  P.  A.  Examination  Questions. 

The  estate  consisted  of: 

Cash  on  hand  $246.19 

Cash  at  Safety  Trust  Co 3,556.50 

18  Imp.  Jap.  Gov.  4J4%  gold  bonds  at  $1,000 i8,'ooo!oo 

30  shares  Chicago  &  Northwestern  R.  R.  stock  at  155. .  4,650.00 

25  shares  Penn.  R  R.  stock  at  122 3,050.00 

2  demand  notes  at  $500  each lioooioo 

Stock  m  business  9,375.oo 

The  testator  owed  to  F.  Harbor  $1,500.00. 

The  appraiser  appointed  by  the  court  inventoried  the  estate  as  follows : 

18  Imp.  Jap.  Gov.  4^%  gold  bond  at  $1,020.00. 
30  shares  Chicago  &  Northwestern  at  152  1-9. 
25  shares  Penn.  R.  R.  stock  at  120. 
2  demand  notes  as  per  inventory. 
Stock  of  goods  $8,000.00. 

The  executor  collected  from  the  trust  company  of  $3,556.50  and  also 
$28.96  in  interest.  He  sold  the  stock  at  the  appraised  figures  and  the 
bonds  at  $1,025.00.  He  paid  to  F.  Harbor  the  amount  due  him  to  B. 
Robert,  undertaker,  $786.00  for  funeral  expenses.  He  also  paid  for  sun- 
dry expenses  $286.00  approved  by  the  court.  He  deducted  his  commis- 
sion and  distributed  the  funds  according  to  the  last  will. 

From  the  above  statement  prepare: 

(i)  Schedules  for  presentation  to  the  court  in  final  accounting. 

(2)  Statement  of  commissions  to  which  the  executor  was  entitled. 


(6)  Harvey  Bros,  became  financially  embarrassed,  and  a  trustee  was 
appointed  January  i,  1907,  to  take  charge  of  their  aflfairs  for  the  benefit 
of  the  creditors. 

On  that  date  (January  i,  1907),  the  financial  condition  was  shown 
by  their  balance  sheet  as  follows: 


313 


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Accounting  Problems  and  Solutions. 


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C  p.  ^.  Examination  Questions. 

In  order  to  advantageously  realize  on  all  assets,  the  trustee  purchases 
merchandise  to  the  amount  of  $10,000.00  and  during  the  year  collected 
$21,350.00  cash  for  sales.  The  book  debts  realized  $3,950.00.  Of  the 
bills  receivable  entered  in  the  balance  sheet  as  $18,000.00  there  was  on 
hand  only  $8,000.00,  the  balance  of  $10,000.00  having  been  discounted  with 
the  bank  and  which  are  represented  on  the  liability  side  by  the  item 
notes  receivable  discounted.  The  $8,000.00  notes  on  hand  realized  the  full 
sum,  while  of  the  $10,000.00  discounted  with  the  bank  only  70%  could  he 
realized,  the  balance  was  lost. 

The  bills  payable,  accounts  payable,  taxes,  and  interest  on  mortgages 
(5/^%)  were  paid  in  course  of  settlement. 

Current  expenses  were  as  follows:  Salaries  $1,000.00,  office  expenses 
$800.00,  legal  fees  $1,200.00,  withdrawals  for  private  use  by  the  owners 
$2,000.00,  trustee's  commission  $2,000.00.  On  January  i,  1908,  the  trustee 
surrendered  charge  of  the  estate  and  paid  over  the  cash  balance  on  hand. 

There  remained  on  that  date  merchandise  on  hand  $5,600.00. 

Prepare  a  realization  and  liquidation  account,  a  trustee's  cash  account, 
and  a  balance  sheet  of  the  estate  at  termination  of  trust. 


Practical  Accounting. 
Maryland  Exammation,  January,  1909. 

Time  AUowed,  from  9.30  A.  M.  to  12.30  P.  M.— Answer fAU 'Questions 

Fully. 

Do  not  repeat  questions  on  examination  papers,  hut  write  answers 
fully,  designating  the  questions  by  number.  The  intelligence  indicated  by 
answers  and  the  neatness  and  general  appearance  of  papers  will  be  con- 
sidered in  marking  applicants,  as  well  as  the  technical  accuracy  of  such 
answers. 

I.  John  Ames  and  James  Dove,  each  carrying  on  a  similar  business 
agree  to  form  a  partnership  under  the  name  of  Ames  &  Dove,  and  that 
the  new  firm  should  take  over  the  assets  of  each  partner  and  assume  the 
liabilities  of  each. 

The  partnership  was  formed  on  January  r,  1907,  and  the  total  balances 
of  each  on  that  date  were  as  follows: 


JOHN  AMES. 

Capital 

Machinery  and  Tools .......$  45,000 

Cash siooo 

Bills  Receivable 3,000 

Accounts  Receivable 23,000 

Merchandise,  as  per  Inventory 15000 

Wages 6;ooo 

Wages,  due  but  impaid 

315 


S  35,000 


1,000 


i 


'.\ 


1( 


ll^^ 


I        > 


III 


Accounting  Problems  and  Solutions, 

Expense  Account ,0  «^^ 

Bills  Payable '^'°°°           . 

Suspense  Account ,  ^^„  25,000 

Merchandise  Sales ^'°°° 

Accounts  Payable 35»ooo 

Repairs,  Machinery  and  fools. . . .  . .  '.  .  .' .' ." .' " ." ." .' ." .' .' .' .'  3  000  ^5. 5 00 

Xx  C^XI  u  •. 

Rent,  due  but  unpaid '. .  '         '°°°  ^00 

$125,000     $125,000 

JAMES  DOVE. 

Capital * 

Machinery  and  Tools .'.'::::;; $2C  000 

Cash. . .  . : f '00 

Accounts  Receivable '.'.'.'.' 20'onn 

BUls  Receivable []] ''°'°°° 

Merchandise,  as  per  Inventory .'.*.' 10  000 

Wages ; ;  •  •  •    2' 

Wages,  due  but  unpaid '  '^ 

Expense  Account ^  e  n^o 

Bills  Payable .* ; ; '5'°°°       ^^  ^^^ 

Suspense  Account ' '    "  i  qoo         °'°°° 

Merchandise  Sales 

Accounts  Payable .*;.*.' i  c'oo° 

Repairs,  Machinery  and  Tools '.[.'/. 2  croo 

Rent '^ 

1,000 

$87,500     $87,500 

Each  partner  is  to  receive  one-haif  of  the  profits. 

Formulate  the  opening  entries  for  the  new  partnership. 

At  the  end  of  the  year  a  profit  was  shown  of  $30,000.  Using  your 
own  figures  formulate  a  trial  balance  at  the  end  of  the  year  and  divide 
the  profits  between  the  partners. 

2.  You  are  named  as  the  Executor  of  W.  J.  B.  deceased,  and  find  the 
following  assets  belonging  to  the  Estate. 

Cash  in  Bank ^^ 

1000  Shares  Electric  Railway  Co.  Stock' '  "  '.■.■.■..■.market  Value  $  so  each 

500               Telephone  Co.                   *'  "          -         ,_     A 

10       "       B.  &0.  R.  R.  Co.  "  "  "     ■   o.     •' 

S       "       Gas  Co.  "  '•  «« 

$10,^000  par  value,  L.  S.  &  M.  S.  R.  R.  Co.  Bonds.^    market  value  ^95   % 

50,000                     G.  &  S.  I.  R.  R.  Co.  "                "          -      10^  0 

45,000    "       "       Consolidated  Gas  Co.  '*     .           "          "        gj^^ 

The  stocks  and  bonds  have  been  appraised  at  their  market  value  and 
the  appraisers  also  return : 

Forty-five  houses  valued  at  $2,000  each,  but  each  subject  to  a  mort- 
gage of  $1,000  redeemable  at  option  of  mortgagor,  and  household  furni- 
ture, $2,000  and  horses,  carriages  and  harness,  $1,800. 

During  the  year  of  your  administration  of  the  Estate  the  following 
cash  comes  into  your  hands: 

.^16 


C.  P.  A.  Examination  Questions, 


Saleof  1000  shares  of  Electric  Railway   Co    stock 
500      •'        '•  Telephone  Co. 
10      "        "  B.  &0.  R.  R.  Co.  "     ■ 

5      "        "  Gas  Co.  "    ■ 

;;  $10,000  L.  S.  &  M.  S.  Railway  Co.  Bonds" 
50,000  G.  &  5.  I.  R.  R.  Co. 
45.000  Consolidated  Gas  Co. 


@ .    .$47 .00  per  share 
@. .  .   35.00     *• 
@.  .  .100.00    "        " 
@. .  .    50.00    " 

•@ 98  % 

.@ 100  % 


'  Horses,  carriages  and  harness. .  '  ^ «°/l^ 

,,       ,  ,  *i,ooo 

You  have  also  sold  5  of  the  houses  for  $2,200  each 

The  Estate  has  the  right  to  subscribe  for  250  shares  of  Telephone  Co 

stock  at  par  $25.00  each,  and  you  sold  this  right  for  $1,500  cash 

Rentals  received  of  houses  amounted  to  $6,200  and  dividends  and 

mterest  as  follows: 

Telephone  Co.,  $1.00  per  share ^  ^ 

?•  ^  9\?-  ^-  ^^•'  ^2  50  per  share W. ^  5°o.oo 

L.  S.  &  M.  S.  R.  R.  Co  Bonds  2  %        ^^  -oo 

G.  &  S.  1.  R.  R.  Co.              "      2W '''"  "" 

Consolidated  Gas  Co.  "      2l^  


200 .00 
1,250.00 
1,125  00 


You  have  made  the  following  payments  on  account  of  the  Estate- 

Puneral  Expenses «■  " 

Debts  due  by  decedent. . .  *  o  J^°°° 

Taxes  on  Real  Estate  8,800 .00 

Water  Rents 2,250.00 

Mortgages  on  45  houses'. '.'.'.'.'.'. 270 .00 

Interest  on  Mortgages  45,000 .00 

Repairs  to  Real  Estate       2,685  .00 

580 . 00 

By  the  terms  of  the  Will,  the  Estate  is  to  be  divided  between  four  (4) 
persons  m  the  following  proportions-  A.  four-twentieths;  B.  five-twen- 
tieths;  C.  six-twentieths  and  D  five-twentieths. 

By  agreement  and  with  consent  of  the  Court,  "  C. "  agrees  to  take  the 
household  furniture  at  its  appraised  value. 

inhI>L?r^'  ^^^.tfP^^^T''  ^^^'  ^^°^^*  '°  ^4^5.00.     The  collateral 
inheritance  ta^  is  2^%  on  the  net  amount  of  the  Estate,  and  the  Court 

tie  Estate.  ^'  '°°^^''^°"  5%  on  $20,000.00,  and  2%  on  the  balance  of 

Prepare  an  Inventory  on  the  basis  of  the  values  stated  and  a  final 
account  showing  the  distribution  of  the  Estate. 

(Two  Additional  Questions  will  be  given  this  P.  M.) 


Practical  Accounting 


Time  Allowed,  From  1.30  P.  M.  ^to^4.3o  P.   M.-Answer  All  Questions 

Do  not   repeat  questions  on  examination   papers    but    i.yrii^   „« 
fully,    designating   the   questions   by   nunAer      Tl^  iJUL  answers 

by  angers  and  tie  neatness  aZ  gZeZap^rarl^e  ofpaZTLnf'"''"^ 

i^    '^'•^  Star  Furniture  Company  has  retained  you  to  audit  its  accounts 
or  the  year  ended  June  30,  1908,  and  to  prepare  a  Balance  Sheet   M^u 
facturmg  and  Profit  and  Loss  accounts  for  the  year. 

317 


l!  '    |1 


i'l'''         I 


Accounting  Problems  and  Solutions. 

You  are  expected  to  write  a  brief  report  of  not  less  than  two  hiindred 
(200)  nor  more  than  four  hundred  (400)  words  dealing  with  your  audit, 
showing  its  scope  and  discussing  any  matters  relating  to  the  accounts 
which  may  seem  to  you  to  be  of  interest. 

The  Company  was  incorporated  July  i,  1907,  and  took  over  the  busi- 
ness of  Jones  &  Brown,  whose  capital  was  inadequate  to  properly  carry 
on  the  same. 

The  Balance  Sheet  of  July  i,  1907,  showed  assets  and  liabilities  as 
follows  : 

ASSETS. 

Cash $  15,762,84 

Materials  and  Supplies 18,375 . 80 

Machinery  and  Tools 136,478 .60 

Office  Furniture  and  Fixtures 1,600 .00 

Bills  Receivable 4,680 .00 

Accounts  Receivable 24,936 .  55 

Accotmts  Receivable  in  Suspense 2,434 . 54 

Furniture,  finished,  at  cost 14,896 .00 

Incorporation  Expenses 500 .00 

Good  Will 40,000 .00 

$259,664,33 

LIABILITIES. 

Bills  Payable $  29,477  ,83 

Accoimts  Payable 28,969 . 23 

Reserve  for  Suspended  Accounts  Receivable 1,217. 27 

Capital  Stock 200,000 .00 

$259,664.33 


The  Trial  Balance  of  June  30,  1908,  was  as  follows: 

Cash $  12,964.80 

Materials  and  Supplies 92,746 .40 

Furniture,  purchased 4,648 .  50 

Salaries  and  Wages,  Salesmen 11,646 .38 

Factory 91,432.70 

Factory  Expenses 4,426 .  52 

General  Selling  Expenses 1,867  .62 

Office  Salaries 8,846 .  50 

Office  Expenses 1,867  .93 

Office  Fixtures  and  Fumittu-e 1,680 .00 

Advertising 2,837  .50 

Insurance,  Factory 2,400 .00 

Taxes,  Factory 2,160 .00 

Light,  Heat  and  Power,  Factory 7,648 .60 

Rent  of  Factory 3,000 .00 

Rent  of  Office i  ,400 .  00 

Machinery  Repairs 4,542  .67 

Freight  and  Drayage,  on  purchases 968 .35 

*          "           "         on  sales 1,967.55 

Interest  and  Discount 4,864 .  80 

Commissions. .  .s 2,618.30 

Bills  Receivable 4,687  .  50 

Accounts  Receivable 21,493 .52 

318 


C.  P.  A.  Examination  Questions. 

BiUs  Payable. .     ,  13.460,85 

Accounts  Payable 21,963 .67 

^f-^^f: •  •  •  •  • : 276,606.63 

Machmery  and  Tools $148,726.80 

Furniture,  finished  (at  cost) 21,648 .00 

Accounts  Receivable  on  Suspense 3^274. 90 

Incorporation  Expenses '500 .00 

Reserve  for  Suspended  Accounts ^48  c  2 

Good  Will 40,000.00 

Dividend  No.  i  (paid  Jan.  2.  1908) 6,000 .00 

Miscellaneous  Receipts ^35  j  - 

Capital  Stock ][  200,000.00 

$502,865.84     $502,865.84 

The  inventory  of  materials  and  supplies  on  June  30,  1908  amoimts 
to  $26,648.87. 

In  your  examination  you  discover  the  following  facts  not  shown  by 
the  books : 

(A)  Invoices  not  entered 

Brooks  Lumber  Co.,  dated  June  15,  1908: 

Mahogany  veneers $224 .00 

Library  Bureau,  dated  May  15,  1908: 

For  filing  case  for  office 125  . 00 

G.  C.  Coal  Co.,  dated  April  10,  1908: 

For  coal  for  factory 167  .  50     $516 .  50 

(B)  The  Company  made  in  its  factory  for  its  own  use  two  rabbiting 
machines,  in  the  construction  of  which  it  used  material  costing  $350.00, 
and  the  mechanics  wages  amounting  to  $250.00. 

You  also  ascertain  that  the  "Accounts  Receivable  in  Suspense" 
taken  over  from  Jones  &  Brown  have  all  been  settled  for  $1,566.79,  but 
that  no  Reserve  has  been  set  up  for  the  "Accoimts  Receivable  in  Sus- 
pense" at  end  of  year,  and  it  is  supposed  a  loss  of  25%  will  be  made  on 
these  accounts. 

Insurance  is  paid  annually  on  September  loth,  and  taxes  on  Jan  ist. 

Depreciation  should  be  allowed  of  10  per  cent,  on  Machinery  and 
Tools,  of  10  per  cent,  on  Office  Furniture  and  Fixtures  and  20  per  cent, 
written  off  from  Incorporation  Expenses. 

2.  The  Towson  Electric  Railway  Company  with  an  authorized 
capital  stock  of  $1,000,000,  consisting  of  5000  shares  each  of  preferred 
and  common  stock  of  the  par  value  of  $100.00  each,  had  on  January  i, 
1907,  assets  and  liabilities  as  follows: 

ASSETS. 

Real  Estate  and  Buildings $  200  000  00 

Power  Plant,  Machinery,  &c 24o!ooo !oo 

Overhead  Construction 160,000  00 

Surface  Construction 200^000 ! 00 

Underground  Construction 175000  00 

Rolling  Stock 300,000  !oo 

Repair  Materials  and  Supplies 10,000 .00 

^^^^ 30,000.00 

319 


» 


Accounting  Problems  and  Solutions, 


m 


li  ''11 1" 
It 'lb" 

i'l  !!Ji!i 
[lii 


I  i! 


m 


w 


LIABILITIES. 

Preferred  Stock authorized $    500,000 .  00 

tinissued 50,000 .00 


Common  Stock authorized $    500,000 .00 

unissued 100,000.00 


First  Mortgage  5%  Bonds,  authorized $    500,000.00 

unissued 150,000.00 


Accounts  Payable. 
Stirplus 


$450,000.00 


400,000.00 


350,000.00 

5,000.00 

110,000.00 

$1,315,000.00 


The  Conowings  Electric  Co.   with  an    authorized    capital  stock  of 
$500,000 .00  had  on  the  same  day  assets  and  liabilities  as  follows: 

ASSETS. 

Real  Estate  and  Water  Rights $  300,000 .  00 

Power  Plant,  Machinery,  &c 170,000.00 

Overhead  Construction 125,000 .00 

Accounts  Receivable 15I000 .00 


Profitjand  Loss. 


$    610,000.00 
10,000.00 

$    620,000.00 


LIABILITIES. 

CapitalfStock $  500,000 .  00 

First  Mortgage  6%  Bonds 100,000 .  00 

Accounts  Payable 20,000 .  00 


$    620,000.00 


The  Towson  Electric  Railway  Co.  purchased  on  January  i,  1907, 
securities  of  the  Conowings  Electric  Co.  in  quantities  and  at  prices  as 
follows : 

$400,000.00  of  the  Capital  Stock  at  $125.00  per  share  in  cash. 

$  60,000.00  of  the  Capital  Stock  at  $125.00  per  share  payable  with 
$50,000.00  of  the  preferred  stock  of  the  Towson 
Electric  Ry.  Co.  at  $150.00  per  share. 

$100,000.00  of  the  6%  bonds  at  115%  payable  in  the  unissued  com- 
mon stock  of  the  Towson  Electric  Ry.  Co.  at  $90.00 
per  share,  and  cash  to  balance. 

$  10,000 .00  of  the  cash  payable  for  the  stock  purchased  to  be  passed 
to  the  credit  of  the  Profit  and  Loss  account  of  the 
Conowings  Electric  Co.  by  the  vendors  to  cancel  the 
charge  of  like  amoimt  to  said  account. 

To  provide  funds  to  meet  the  above  obligations,  and  also  to  retire 
its  5%  mortgage  bonds,  at  105%  the  Towson  Electric  Ry.  Co.  issued 

320 


i 


C.  p.  A.  Examination  Questions, 

$1,000,000.00  of  50  year  4%  bonds,  dated  January  i,  1907,  and  sold 
the  entire  issue  for  cash  at  90%. 

Assuming  that  the  dividend  of  the  Conowings  Electric  Co.  declared 
during  the  year  1907  amounted  to  $40,000.00,  and  the  profits  of  the 
Towson  Electric  Ry.  Co.  from  operating,  exclusive  of  interest  on  its 
bonded  debt,  amounted  to  $100,000.00,  to  what  extent  has  the  profit  and 
loss  of  the  Towson  Electric  Ry.  Co.  been  affected,  during  the  year,  by 
reason  of  its  acquisition  of  the  securities  of  the  Conowings  Electric  Co., 
and  of  the  redemption  of  its  own  5%  bonds. 

Show  also  the  condition  of  accounts  of  the  Towson  Electric  Railway 
Company  at  the  end  of  the  year. 


I 


i 
! 


Commercial  Arithmetic. 

Time  AUowed  from  10  A.  M.  to  12  P.  M.— Answer  All  Questions  Fully. 

Do  not  repeat  questions  on  examination  papers,  hut  write  answers  fully, 
designating  the  questions  by  numbers.  The  intelligence  indicated  by  answers 
and  the  neatness  and  general  appearance  of  papers  will  be  considered  in 
marking  applicants,  as  well  as  the  technical  accuracy  of  such  answers. 

1.  I  received  $4,850.00  and  a  consignment  of  2000  bbls.  of  flour 
from  Badeau  &  Co.,  which  I  sold  at  $7.50  a  bbl.,  and  invested  the  net 
proceeds  and  cash  in  cotton;   how  much  did  I  invest  in  cotton   my  com- 
mission being  3%  for  selling  and  1^%  for  buying  and  the  expenses  for 
storage  and  freight  $350.00? 

2.  "A"  exchanged  82  shares  of  Bank  Stock  ($50.00)  at  3i%  premium 
for  106  shares  of  Camden  &  Atlantic  R.  R.  Stock,  at  47i,  paying  the 
balance  in  cash;   how  much  cash  did  he  pay? 

3.  I  bought  a  6%  mortgage  for  $2,500.00  at  5%  discount,  with  two 
years  to  run;  what  rate  of  interest  do  I  get  on  the  money  invested,  if 
the  mortgage  is  satisfied  at  maturity.'' 

4.  A  grocer  bought  a  bbl.  of  Molasses,  and  after  i  of  it  had  leaked 
away,  he  drew  6  gals.,  after  which  he  found  it  to  be  f  full  How  manv 
gallons  did  the  bbl.  hold? 

5.  A  broker  buys  a  note  for  $20.00  discount,  the  face  being  $1,904.76; 
what  was  the  time  to  maturity  of  note,  discount  6%,  allowing' 3  davs 
grace?  ^ 

6.  Osgood,  Lee  &  Co.  fail  for  $75,750.00;  the  assignee  sold  the  Real 
Estate  for  $25,000.00,  and  the  remainder  of  their  stock  of  goods  for 
$3,500.00,  and  collected  debts  owing  them  amounting  to  $14,000.00  and 
expended  $1,648.00  in  settling  up  the  business;  what  will  James  Conger 
receive,  whose  claim  is  $33,475.00? 

7.  What  is  the  average  date  of  the  following  account? 

321 


II 
l<l 


I  i .  ill 


*^  V^ 


[I.: 


Accouniing  Problems  and  Solutions. 


James  Henderson. 


1908 

March    9— To  Mdse 
May     12- 
June     19- 


(( 


It 


II 


$  300.00 
474.00 
564.00 


1908 
March  20— By  Cash. 
May     14 — 
July     10— 


(( 


(< 


(( 


(( 


$  247.00 

400 . 00 
260.00 


$1,338.00  S  907.00 

8.  Add  together  3.01479,  23.987645,  451.0057,  .038971,  2.38179, 
.0041245,  117.010589,  1314.576399,  multiply  the  sum  by  0.003  and 
divide  the  product  by  .0143015. 

9.  A  Merchant  effected  $40,000.00  Insurance  on  property  worth 
$60,000.00;  his  policies  contained  the  usual  80%  Co-Insurance  clause; 
a  loss  of  $30,000.00  was  sustained.  What  sum  should  the  Merchant 
receive  from  the  underwriters  in  a  correct  settlement  of  the  loss? 

10.  The  owner  of  f  of  a  vessel  insured  }  of  his  interest  at  2^% ;  the 
premium  so  paid  amounted  to  $562.50;  his  policies  contained  the  Marine 
100%  Average  Clause;  the  vessel  sustained  a  loss  by  fire  of  $5,000.00, 
What  sum  do  the  insurers  owe  him? 


Theory  of  Accounts. 


Time  Allowed  from  1.30  P.  M.  to  4  P.  M.— Answer  All  Questions  Fully. 

Do  not  repeat  questions  on  examination  papers,  but  write  answers 
fully,  designating  the  questions  by  number.  The  intelligence  indicated  by 
answers  and  the  neatness  and  general  appearance  of  papers  will  be  con- 
sidered in  marking  applicants,  as  well  as  the  technical  accuracy  of  each 
answers. 

1.  Describe  the  following: 

(A)  Trial  Balance. 

(B)  Balance  Sheet. 

What  is  the  essential  difference  between  them? 

2.  Preparatory  to  closing  the  books  of  a  car  building  company,  would 
you  allow  in  any  manner  for  incomplete  contracts,  and  how? 

Describe  fully  and  specifically  what  you  would  do. 

3.  In  case  of  total  loss  of  stock  of  merchandise  by  fire,  the  books 
being  saved,  how  would  you  prepare  a  claim  against  the  insurance  com- 
pany? 

4.  (A)  What  effect  has  an  over-estimated  inventory  on  the  business 
of  a  mercantile  firm? 

(B)     What  effect  has  an  under-estimated  inventory  on  the  busi- 
ness of  a  mercantile  firm? 

5.  Define  double  entry  bookkeeping,  and  state  wherein  it  differs 
from  single  entry  bookkeeping. 

322 


C.  P,  A.  Examination  Questions. 

6.  What  are  the  advantages  and  disadventages,  if  any,  of  a  Voucher 
System?     Explain  fully  how  conducted. 

7.  Explain  fully  the  meaning  of  the  foUoiwng  terms: 

Quick  Assets. 
Floating  Debts. 
Fixed  Charges. 
Contingent  Liabilities. 

8.  (A)     What  is  a  sinking  fund? 

(B)  From  what  source  is  it  derived  and  what  accounts  charged  ? 

(C)  If  not  set  aside,  in  compliance  with  requirements  of  a  bond 
issue,  how  may  it  effect  a  corporation? 

9.  What  is  appreciation,  and  what  is  depreciation? 
Give  examples. 

10.  Explain  wherein  a  statement  of  receipts  and  disbursements 
differs  from  one  of  revenue  and  expenditure? 

Illustrate  by  an  example. 

11.  Describe  fully  what  procedure  and  methods  you  would  adopt 
if  called  upon  to  introduce  and  install  a  new  system  of  Bookkeeping  (not 
cost  system)  in  the  office  of  a  large  manufacturing  concern. 

12.  What  is  the  difference,  if  any,  between  a  ''Trading  Account" 
and  a  "Profit  and  Loss  Account?"    Illustrate. 

13.  Describe  a  cost  system  with  which  you  are  familiar,  covering 
details,  and  give  your  views  as  to  its  correctness  or  otherwise,  and  its 
bearing  upon  the  general  books. 

14.  Define  Funded  Debt,  Floating  Debt;  and  Fixed  Charges.  Is 
interest  on  Floating  Debt  properly  considered  a  fixed  charge  ?  State 
reason. 

15.  Describe  the  working  methods  of  a  Clearing  House  Association 
as  operated  in  the  large  cities.  If  a  National  Bank  wishes  to  issue  ''Na- 
tional Bank  Notes  "  and  place  them  in  circulation,  what  is  the  course  of 
procedure,  and  how  are  they  finally  redeemed? 


Auditing. 

Time  Allowed,  From  9.30  A.  M.  to  12  M.— Answer  All  Questions  Fully. 
Do  not  repeat  questions  on  examination  papers,  hut  write  answers  fully 
designating  the  questions  by  number.     The  intelligence  indicated  by  answers 
and  the  neatness  and  general  appearance  of  papers  will  be  considered  in 
marking  applicants,  as  well  as  the  technical  accuracy  of  such  answers. 

1.  What  are  the  responsibilities  of  an  auditor,  and  what  should  be 
his  qualifications? 

2.  In  making  a  quick  audit  of  a  bank  for  a  suspected  embezzlement, 
what  would  be  your  mode  of  procedure? 

3 .  When  the  Voucher  System  is  used,  how  would  you  protect  yourself 
agamst  fraudulent  Vouchers  or  duplications  of  the  same? 

S2Z 


! 


I'M 


I<l, 


4. 


6. 


Accounting  Problems  and  Solutions. 

How  would  you  audit  the  stock  certificate  book  of  a  corporation  ? 

(a)  When  the  corporation  has  no  register? 

(b)  When  the  corporation  has  a  register? 

Describe  in  detail  your  method  of  conducting  an  audit  of 

(a)  A  manufacturing  corporation. 

(b)  A  commission  house. 

How  would  you  prove  correctness  of  bills  receivable  and  bills 
payable  when  balances  are  brought  down  monthly' 

7.  Of  what  use  is  the  Minute  Book  of  a  corporation  to  an  auditor  who 
ismaking  the  first  annual  audit  of  the  company  ? 

8.  A  bookkeeper  of  a  manufacturing  concern  fails  to  make  all  proper 
charges  of  time  sales.  No  order  book  was  kept.  He  retains  twelve  to 
fifteen  himdred  dollars  yearly  for  five  years  of  payments  received  on 
accoimt  of  time  sales  by  cashing  the  cheques  received  in  due  course,  out  of 
the  cash  drawer,  and  deposits  the  said  cheques  regularly  in  the  firm's 
bank  account,  properly  endorsed  by  the  firm.  Howwotild  you  detect  this? 

9.  If  you  are  called  upon  to  audit  the  accounts  of  a  Building  and 
Loan  Association  whose  principal  investment  is  in  mortgages,  how  would 
you  prevent  the  introduction  of  cancelled  or  fictitious  mortgages? 

10.  In  auditing  the  accounts  of  a  firm  you  find  a  number  of  dis- 
honored and  overdue  notes  which  form  part  of  the  balance  of  bills  receiv- 
able account.     State  fully  what  you  would  do  with  these? 

1 1 .  State  the  general  principles  governing  the  discrimination  between 
what  constitutes  proper  charges  against  Capital  and  what  constitutes 
proper  charges  against  Revenue. 

12.  If  the  Cash  on  hand  at  the  date  of  a  Balance  Sheet  had  not  been 
verified  on  that  date,  how  should  the  Auditor  satisfy  himself  as  to  its 
correctness  before  signing  the  certificate. 

13.  Are  you  as  a  "Certified  Public  Accountant"  justified  in  certifying 
to  a  Balance  Sheet  in  case  the  Books  of  Accoimt  are  not  in  balance? 
Give  reasons. 

14.  If  you  were  called  upon  to  make  an  examination  of  the  affairs  of  an 
Insurance  Company,  and  find  upon  the  Ledger  an  "Investment  Account" 
showing  a  debit  balance  of  $250,000.00,  how  would  you  proceed  to  prove 
the  correctness  of  same?  Would  you  set  up  this  item  in  the  balance 
sheet  at  Ledger  value ;  Cost  value;  Market  value  or  Par  value.  Give  reasons. 

15.  What  constitutes  a  thorough  examination  of  a  Bank?  Write  a 
report  covering  such  examination. 


Commercial  Law. 

Time  Allowed,  From  1.30  P.M.  to  4  P.M.- 

But  No  More. 


-Answer  10  Questions, 


Do  not  repeat  questions  on  examination  papers,  but  write  answers  fully, 
designating  the  questions  by  number.  The  intelligence  indicated  by  answers 
and  the  neatness  and  general  appearance  of  papers  will  be  considered  in 
marking  applicants,  as  well  as  the  technical  accuracy  of  such  answers. 


324 


C.  p.  A.  Examination  Questions. 


1.  When  an  endorsed  promissory  note  is  not  paid  at  maturity: 

(a)  What  course  should  the  holder  pursue  in  order  to  prove  that 

payment  has  been  demanded  of  the  maker  of  the  note. 

(b)  Against  whom  has  the  holder  a  right  of  action  for  recovery? 

(c)  Against  whom  has  an  endorser  who  has  been  compelled  to  pay 

a  dishonored  note  a  right  of  action  for  recovery  ? 

(d)  Under   what    circumstances    is    an    endorser    relieved    from 

liability  as  such? 

(e)  How  may  the  holder  be  relieved  from  the  necessity  of  pro- 

testing a  note  for  non-payment,  in  order  to  preserve  the 
liability  of  the  endorser? 

2.  What  is  the  difference  between  a  general  and  a  special  agent,  and 
what  is  the  difference  between  the  liability  of  the  principal  for  the  acts 
of  each? 

3.  A.  and  B.  were  partners.  C.  was  a  salesman  for  the  firm,  and  for 
his  services  he  was  paid  one-tenth  of  the  profits  of  the  firm.  The  firm 
owed  D.  $1,000  on  open  account,  and  D.  sued  A.,  B.  and  C.  as  partners, 
is  C.  liable  as  a  partner  or  not?     Why? 

4.  Where  a  valid  debt  exists  for  a  certain  sum  of  money,  does  a 
receipt  for  a  less  sum  specifying  that  it  is  "in  full  of  the  debt"  or  "of  all 
demands ' '  debar  the  creditor  from  collecting  the  amount  tmpaid  ?  Explain  ? 

5.  The  maker  of  a  promissory  note  sends  the  payee  his  cheque  for 
the  amoimt  on  the  day  of  maturity.  The  payee  has  the  cheque  certified 
at  bank,  but  before  it  is  paid  the  bank  fails.  Is  the  maker  relieved  of 
liability  on  the  note  by  such  certification?     Give  reasons  for  your  answer. 

6.  Name  two  circumstances  imder  which  a  director  of  a  corporation, 
organized  in  Maryland  under  the  general  corporation  law  of  the  State, 
would  be  held  personally  liable  for  debts  of  a  corporation.  To  what 
extent  would  he  be  liable? 

7.  What  is  the  law  in  Maryland  in  respect  to  the  liability  of  stock- 
holders in  Trust  Companies  organized  under  the  laws  of  that  State? 
What  is  the  liability  in  a  National  Banking  Association  in  the  United 
States  Statutes? 

8.  How  should  the  assets  of  a  copartnership  be  applied  where  there 
are  individual  creditors  of  the  separate  members  as  well  as  creditors 
of  the  firm? 

9.  What  is  a  contract?  Who  may  legally  make  a  contract ?  Mention 
the  essential  features  of  a  contract? 

10.  How  is  a  pledge  of  stock  usually  made?  Has  the  pledgee  the 
right  to  sell  or  to  repledge  the  stock? 

11.  How  many  creditors,  and  what  must  be  the  total  amount  of  their 
claims,  to  give  the  right  to  file  an  Involimtary  Petition  in  Bankruptcy? 

When  does  the  Statute  of  Limitations  apply  in  Maryland  on 

(a)  Promissory  Notes. 

(b)  Promissory  Note  under  Seal. 

(c)  Written  Contracts. 

(d)  Written  Contracts  under  Seal. 

(e)  Open  Accounts. 
(£)  Judgments. 

325 


12, 


? 


felffl 

w 


Accounting  Problems  and  Solutions. 


1     J 


i       I 


m. 


njp 


Practical  Accounting— Part  I. 

New  York  Elxamination,  February,  1 909. 

I. IS  to  4.15  p.  m.,  only. 

The  Practical  Accounting  Paper  Consists  of  Part  I  and  Part  II. 

"  The  Regents  of  the  University  shall  make  rules  for  the  examination  of 
persons  applying  for  certificates  under  this  act,  and  may  appoint  a  board 
of  three  examiners  for  the  purpose    ..." 

Laws  of  1896,  ch.  312,  §  2. 

Candidates  must  answer  question  i  and  one  of  the  others.  Answers 
in  excess  of  the  number  required  will  not  be  considered.  Do  not  repeat 
questions  but  write  answers  only,  designating  by  number  as  in  question 
paper.  Check  (^\J)  the  number  of  each  one  of  the  questions  you  have 
answered.  Each  complete  answer  will  receive  25  credits.  Papers  enti- 
tled to  75  or  more  credits  will  be  accepted. 

I.  A  B  acquires  all  the  shares  of  the  capital  stock  of  the  Vendor 
Water  Company,  and  in  order  to  reorganize  it,  forms  the  Purchaser  Water 
Company  with  an  authorized  capital  stock  of  $1,000,000  divided  into 
$500,000  common  and  $500,000  preferred  stock.  Bonds  amounting  to 
$1,000,000  are  also  authorized  by  the  Purchaser  Company.  A  contract 
is  executed  between  A  B  individually  and  the  Vendor  Water  Company 
by  which  the  latter,  for  a  cash  consideration,  transfers  to  A  B  all  its 
property  subject  to  its  existing  debts.  A  B  then  sells  the  property 
acquired  from  the  Vendor  Water  Company  to  the  Purchaser  Water 
Company  for  the  sum  of  $1,999,000  payable  $1,000,000  in  bonds,  $500,000 
in  preferred  stock  and  $499,000  in  common  stock  of  the  Purchaser  Water 
Company.  The  Purchaser  Company  also  agrees  to  pay  all  the  existing 
debts  of  the  Vendor  Company.  The  board  of  directors  of  the  Purchaser 
Company  appraises  the  acquired  plant  at  a  valuation  equal  to  the  difference 
between  the  sum  paid  for  the  total  assets  of  the  old  company  plus 
liabilities  assumed  and  the  value  of  the  assets  acquired  exclusive  of  the 
plant.  The  Purchaser  Company  receives  in  its  treasury  $1,000  cash  from 
A  B  for  10  shares  of  stock  issued. 

Frame  the  opening  journal  and  cashbook  entries  of  the  Purchaser 
Water  Company,  and  prepare  the  balance  sheet  of  the  Purchaser  Com- 
pany from  the  entries. 

The  balance  sheet  of  the  Vendor  Company  on  the  date  of  the  transfer 
was  as  follows: 

Assets. 

Plant    $1,253,000 

Cash  • 17,000 

Notes  receivable 6,000 

Accounts  receivable • 85,000 

Materials  in  stock   35,000 

Unexpired  insurance    1,000 

326 


Ifi 


C.  p.  A.  Examination  Questions. 

Interest  paid  in  advance  on  notes  payable 3,000 

Trust  company  (deposit  to  pay  coupons) 250 

Stock  of  other  companies go  qqq 

Total  assets $1,480,250 

^^fi^^*    3,848 

^''^''^    • $m84.098 

Capital  Stock  and  Liabilities. 
Capital   stock    $1,000,000 

^°"^s  200,000 

Notes  payable  ^^^^^ 

Accounts  payable 70,000 

Meter  deposits   j  g^ 

Accrued  interest  on  bonds ^[ooo 

Coupons  payable  ^co 

Reserve   for  bad  debts 7000 

Reserve  for  depreciation  of  plant 50000 


$1,484,098 

2.  A,  B,  C,  and  D,  partners  sharing  profits  equally,  decided  to  dissolve 
partnership.  On  June  30,  1908,  an  arrangement  was  made  by  which  D 
was  immediately  paid  $18,000  in  cash  for  his  interest,  and  the  remaining 
partners  liquidated  the  business.  The  debts  were  paid  in  full,  the  machin- 
ery and  fixtures  were  sold  for  $21,800,  the  merchandise  brought  $17,500, 
and  all  accounts  and  notes  were  collected  in  full  excepting  a  special  allow- 
ance of  $500  made  to  one  of  the  customers.  An  amount  of  $2,000  was 
disbursed  for  expenses  in  liquidating  the  business. 

Prepare  profit  and  loss  statement,  and  a  statement  of  assets  and  liabili- 
ties as  of  June  30,  1908,  using  the  value  of  the  assets  as  determined  by  the 
liquidated  values;  also  prepare  partners'  accounts  showing  the  cash  to  be 
distributed  to  them. 

The  trial  balance  of  the  firm  on  June  30,  1908,  showed  the  following 
accounts  : 

.,         .    ,  Debits.       Credits. 

A  s  capital  account    toe  nnr. 

s  capital  account    o-  .^ 

C,            .^  ,                                                                          ^5,two 

s  capital  account    ^c  000 

D's  capital  account  oe'rw^ 

r*     t  *5»ooo 

^^^^    $18,400 

Notes  receivable j^  000 

Accounts   receivable   26  000 

Merchandise  inventory  of  Jan.  i,  1908 20,000 

Machinery  and  fixtures  25*000 

Merchandise  purchases,  Jan.  i  to  June  30,  1908 70000 

Salaries .^  ^^^ 

327 


ii 


\k: 


'A 
>i' 

'if".  V 


L' 


vcj 


il  n 


W 


i;.f. 


I 


111 


Accounting  Problems  and  Solutions. 
Office  expenses  2  i;oo 

Re^ts ;;;;;;;       /go^ 

•*  ^^^^ 1,000 

Interest    2,000 

A's  personal  account 2  000 

B's  personal  account   20  000 

C's  personal  account   3  qoo 

Sales,  Jan.  i  to  June  30 7^  000 

Notes  payable  ^'.'.'.'.'.'.'.  aojooo 

Accounts   payable 10,200 

Accrued  interest  on  notes 'coo 

Accrued  taxes  j  q^^ 

"^^^^'^   $215,700        $215,700 

3.  A  certified  public  accountant  is  engaged  by  a  manufacturer  of  lum- 
ber to  devise  and  install  a  system  of  accounts  that  will  make  provision 
for  proper  monthly  balance  sheets  and  for  statements  of  income  and  profit 
and  loss.  Among  the  many  things  to  be  provided  for,  the  certified  public 
accountant  is  confronted  with  a  situation  that  grows  out  of  the  custom  to 
sell  on  terms  of  60  days,  and  at  prices  f.  o.  b.  to  destination,  without  pre- 
payment on  the  carrier's  charges.  The  following  items  illustrate  condi- 
tions disclosed  during  the  first  three  months  in  which  the  system  is  in 
operation,  viz.: 

Shipment  invoiced  in  January  at  $192;  carrier's  charges  estimated 
at  $47;  carrier's  receipted  freight  bill  remitted  by  vendee  in  March 
for  $50. 

.  Shipment  invoiced  in  January  at  $240;  carrier's  charges  estimated 
at  $65;  carrier's  receipted  freight  bill  remitted  by  vendee  in  March 
for  $60. 

Show  what  provision  should  have  been  made  by  the  certified  public 
accountant  for  recording  these  items  and  how  he  should  have  converted 
them  into  journal  entries  during  the  course  of  his  installation  of  the 
system.  In  other  words,  disregarding  any  classification  of  the  sales, 
illustrate  proper  records  in  columnar  form  for  the  recording  of  a  large 
number  of  these  transactions,  enter  therein  the  items  given  above,  total 
the  columns  for  the  respective  months  and  make  journal  entries  to  carry 
such  totals  to  ledger  accounts  necessary  and  proper  for  accomplishing  the 
desired  end. 


Theory  of  Accounts. 

9.15  a.  m.  to  12.15  P-  m.,  only. 
"  The  Regents  of  the  University  shall  make  rules  for  the  examination 
of  persons  applying  for  certificates  under  this  act,  and  may  appoint  a 
board  of  three  examiners  for  the  purpose    ..." 

Laws  of  1896,  ch.  312,  §  2 

328 


C.  P.  A.  Examination  Questions. 

Answer  10  questions  but  no  more.  Answers  in  excess  of  the  number 
required  wtll  not  be  considered.  Do  not  repeat  questions,  but  write  an^ 
swers  only,  desigmttng  by  number  as  in  question  paper.  Check  (^) 
the  number  of  each  one  of  the  questions  you  have  answered.  Each  com- 
plete answer  will  receive  10  credits.  Papers  entitled  to  75  or  more 
credits  will  be  accepted. 

I.  Draw  up  a  form  for  the  record  of  household  accounts  or  of  a 
small  trading  busmess,  that  may  be  used  as  a  combined  cashbook, 
journal  and  general  ledger.  Give  the  headings  and  provide  Hve  distribu- 
tion columns  for  expenditures,  and  also  columns  for  controlling  accounts 
tor  both  accounts  payable  and  accounts  receivable. 

2.  Describe  three  plans  or  bases  for  distributing  factory  expenses  or 
shop  burden  to  the  individual  costs  of  the  jobs  or  the  articles  manu- 
factured. 

3.  What  are  the  principal  differences  in  the  incorporation,  the  public 
examination,  and  the  sources  of  income  of  a  national  bank  and  of  a  trust 
company  doing  a  banking  business  ? 

4.  Distinguish  between  the  registration  of  stock  certificates  and  the 
registration  of  negotiable  bonds  of  a  corporation,  and  explain  fully  the 
purposes  of  such  registrations. 

5.  The  accounting  department  of  a  jobbing  house,  consisting  of  five 
men,  keeps  the  books,  does  the  billing,  makes  city  collections,  handles  the 
general  and  petty  cash  and  pays  the  invoices  of  the  company.  On  what 
general  lines  would  you  distribute  the  work  of  the  department  for  the 
prevention  of  fraud? 

6.  State  the  advantages  of  using,  colums  in  an  invoice  or  a  voucher 
register  for  distributing  the  expenditures.  When  would  it  be  advisable 
to  use  a  distribution  ledger? 

7.  State  the  essential  diflFerences  between  the  accounts  required  for 
the  cost  accounting  of  a  machine  shop  and  those  required  for  the  cost 
accountmg  of  a  railway  company  not  operating  a  machine  shop. 

8.  Describe  two  methods  of  treating  depreciation  of  machinery  on 
both  the  books  and  the  balance  sheet. 

9-  Business  corporation  A  operates  a  manufacturing  plant  and  controls 
by  ownership  the  entire  capital  stock  of  business  corporations  B  and  C 
The  product  marketed  by  each  is  diflferent  from  that  marketed  by  the 
other  two,  yet  each  utilizes  some  of  the  product  of  the  others  and  regularly 
receives  and  pays  the  invoices  therefor.  A  who  owns  the  lands  on  which 
the  three  plants  are  situated,  charges  rent  to  the  other  two  compaines  and 
furnishes  and  charges  them  with  power,  heat  and  light.  On  account  of 
insufficiency  of  capital,  B  and  C  are  constant  borrowers  from  A  and  pay 
mterest  on  such  loans.  The  profit  or  loss  of  B  and  C  is  taken  over  by  A 
at  the  end  of  each  year,  the  fiscal  periods  of  the  three  being  the  same. 

329 


I 


lii 


i  4 


11  !.. 


Accounting  Problems  and  Solutions. 

It  is  desired  that  the  accounts  shall  be  kept  so  that  the  three  trial 
balances  before  closing  will  permit  of  making,  without  analysis  ol  any 
accounts,  a  con'solidated  statement  of  operations  and  a  consolidated 
balance  sheet  for  the  annual  report  of  Company  A.  in  addition  to  the 
separate  statement  of  each,  that  will  exclude  all  accounts  growing  out  of 
the  interrelations  of  the  three  corporations  and  will  make  the  same 
representation  in  the  classified  accounts  as  though  the  properties  were 
owned  directly  by  Company  A  and  all  of  the  affairs  and  operations  con- 
ducted by  the  Company  A,  State  generally  how  such  a  condition  may  be 
brought  about  in  the  three  trial  balances. 

ID.  State  how  the  following  differ:  a  trail  balance  before  closing,  a 
trail  balance  after  closing,  a  balance  sheet. 

11.  State  what  constitute  contingent  assets  and  contingent  liabilities. 
Give  three  illustrations  of  each.  State  whether  or  not  in  your  opinion 
they  should  be  represented  in  the  books  of  account  and  whether  or  not 
they  should  appear  in  the  balance  sheet  of  a  going  concern;  if  so,  in  wha^ 
manner. 

12.  What,  in  your  opinion,  would  be  the  proper  accounting  record  for 
a  business  corporation  to  make  of  an  appropriation  from  its  surplus 
profits  for  the  amount  of  a  permanent  investment  in  property? 

13.  Wherin  lies  the  principal  difference  between  an  investment  and 
a  venture?  Under  what  conditions  should  interest  enter  into  the  account 
of  either?    Give  reasons. 

14.  Describe  a  cash  accounting  system  that,  in  connection  with  dis- 
bursements through  the  medium  of  a  voucher  check,  would  keep  the  cash 
account  balance  in  agreement  with  the  bank  balance.  Give  description  or 
submit  forms  for  the  records  that  might  be  needed  to  prevent  overdrafts 
against  the  bank  account. 

15.  Illustrate  in  the  form  of  journal  entries  the  accrual  of  discount 
and  the  amortization  of  the  premium  on  bond  investments.  Explain  or 
illustrate  the  relation  of  each  to  the  interest  receipts  and  to  the  income 
returns. 


Practical  Accounting — Part  II. 

9.15  a.  m  to  12.15  P-  ^^>  only* 
"  The  Regents  of  the  University  shall  make  rules  for  the  examination 
of  persons  applying  for  certificates  under  this  act,  and  may  appoint  a  board 
of  three  examiners  for  the  purpose    ..." 

Laws  of  1896,  ch.  312,  §  2. 

Candidates  must  answer  question  4  and  one  of  the  others.  Answers  in 
excess  of  the  number  required  will  not  be  considered.  Do  not  repeat 
questions  but  write  answers  only,  designating  by  number  as  in  question 


{  :"' 


330 


C.  p.  A.  Examination  Questions. 

paper.  Check  (\J)  the  number  of  each  one  of  the  questions  you  have  an- 
swered. Each  complete  answer  will  receive  2$  credits.  Papers  entitled 
to  75  or  more  credits  will  be  accepted. 

4.  Senior  partner  A  desires  to  retire  from  active  business  life.  He 
has  confidence  in  the  ability  and  integrity  of  his  partner  B  and  both  have 
a  like  regard  for  their  sales  manager  C  and  their  works  manager  D,  who 
have  accumulated  considerable  means.  In  this  situation  B  proposes  to 
organize  and  to  continue  the  business  as  a  corporation,  under  his  execu- 
tive management,  and  to  bring  in  sufficient  capital  from  C  and  D  in  equal 
parts  to  pay  off  the  principal  of  a  real  estate  mortgage  falling  due  at  the 
end  of  the  year,  and  sufficient  capital  from  E,  who  is  not  connected  with 
the  business,  to  pay  off  the  principal  of  the  firm's  notes  payable.  It  is 
contemplated  that  E  shall  be  made  the  treasurer  of  the  corporation  and 
that  the  five  parties  shall  be  the  incorporators  and  constitute  the  first  board 
of  directors. 

In  the  discussion  between  A  and  B  it  is  agreed  that  the  net  worth  of 
the  business,  exclusive  of  the  good  will  which  has  never  been  represented 
on  the  books,  shall  be  converted  into  preferred  stock  of  the  corporation 
and  that  the  good  will  shall  be  valued  at  one-half  the  net  worth  and  be 
converted  into  common  stock;  also  that  the  cash  capital  contributed  by 
C,  D  and  E  shall  be  paid  to  the  firm,  used  by  it  for  the  purposes  proposed 
by  B  and  converted  into  preferred  stock  for  account  of  the  three  parties 
respectively.  Thereupon  A  proposes  and  agrees  to  surrender  one-fourth 
of  his  share  of  the  common  stock  on  the  condition  that  it  shall  be  dis- 
tributed as  follows :  two  parts  to  C,  two  parts  to  D  and  one  part  to  E. 

These  matters  are  all  covered  by  written  agreement  of  the  five  parties, 
in  which  agreement  it  is  provided  that  A  and  B  shall  convey  to  the  cor- 
poration all  the  property,  business  and  good  will  of  their  copartnership, 
and  that  all  the  transactions  and  stock  distributions  provided  for  shall 
be  carried  through  and  be  closed  out  in  the  books  of  the  copartnership, 
including  the  sum  of  $5,000,  which  shall  be  advanced  to  enable  the  incor- 
porators to  pay  fully  their  subscriptions  for  10  shares  each  of  the  common 
stock  of  the  corporation. 

A  certified  public  accountant  is  engaged  to  make  an  examination  of 
the  books  and  accounts  at  the  close  of  the  year  just  approaching,  to 
procure  appraisements  of  the  property  and  to  close  the  books  after  pro- 
viding therein  for  his  compensation.  On  the  completion  of  his  work  the 
books  show  the  following  condition : 

Assets. 

Land    $50,000 

Buildings    200,000 

Machinery,   etc 100,000 

Finished   product,   product    in    process,    materials 

and  supplies   150,000 

Notes  receivable  100,000 

Accounts  receivable   100,000 

Cash    100,000 

Total  assets  $800,000 

331  — 


Accounting  Problems  and  Solutions. 

Liabilities  and  Capital. 

Real  estate  mortgage  $100,000 

Accrued  interest  on   real   estate  mortgage 2,500 

Notes  payable   on   demand 50,000 

Accrued  interest  on  notes  payable 1,000 

Accounts  payable   25,000 

Accrued  taxes    6,500 

Reserve  provision  for  uncollectible  accounts 15,000 

A  s   capital    400,00c 

B's  capital    200,000 

Total  liabilities  and  capital $800,000 


Prepare  cash  book  and  journal  entries  to  be  placed  on  the  books  of  the 
copartnership  to  represent  properly  thereon  the  carrying  out  of  all  the 
matters  provided  for  in  the  agreement  of  the  five  parties  and  to  close  said 
books. 

5.     At  the  close  of  the  year  1907  the  books  of  a  manufactur- 
ing  company   show   a   credit   balance   in    the   profit   and   loss 

account  of   $20,000 

and  a  merchandise  account,  based  on  appraisement  of  inventory 

at  selling  prices,  of 36,000 

but  an  appraisement  of  the  same  inventory  at  cost  prices  would 

amount  to    i 27,000 

The  trading,  income,  and  profit  and  loss  accounts  for  the  year 
1908  show  the  following  balances: 

Sales 100,000 

Discount  on  sales i.SOO 

Returns  and  allowances 500 

Purchases 75,ooo 

Freight  on  purchases  3,000 

Discount  on  purchases  600 

Shipping   expenses    2,000 

Selling   expenses    5,000 

Office  and  general  expenses 10,000 

Insurance    300 

Taxes  200 

Depreciation  of  machinery,  fittings  and  furniture 1,000 

Accounts  written  off  as  uncollectible 300 

Interest  on  notes  and  accounts  receivable 1,900 

Interest  on  notes  and  accounts  payable 700 

At  the  end  of  the  year  1908  the  books  were  closed  on  the 

basis  of  an  inventory,  appraised  at  selling  prices,  amounting  to  40,000 

If  this  inventory  had  been  appraised  at  cost  prices  it  would 

have  amounted  to  30,000 


C.  p.  A.  Examination  Questions. 

Prepare  from  these  items  one  statement  showing  the  correct  trading 
and  income  results  for  the  year,  and  another  statement  of  Profit  and  Loss 
Account  opened  with  the  credit  balance  shown  by  the  books  at  the  begin- 
ning of  the  year. 

I 

6.     On  January  1,  1908,  the  condition  of  a  small  trading  company  as 
determmed  by  an  examination  of  that  date  was  as  follows : 

Assets. 
Furniture  and  fixtures   $2  000 

^'^    ''•'•'.'•  500 

Notes  receivable   -  qqq 

Accounts  receivable  ^  qqq 

Merchandise  on  hand ^'qoo 

$14,500 


Capital  Stock  and  Liabilities. 

Capital  stock   

Notes  payable   

Accounts  payable   

Surplus  


$5,000 

3,000 

6,000 

500 


$14,500 


332 


During  the  month  of  January  the  bookkeeper  made  all  entries  in  the 
cash  book  and  in  the  sales  books,  but  made  no  journal  entries  and  did  not 
post  his  ledger.  In  addition  to  the  entries  appearing  on  the  cash  book 
and  on  the  sales  books  the  following  transactions  took  place  during  Janu- 
ary: merchandise  purchased  on  credit  amounting  to  $6,000:  notes  payable 
amounting  to  $6,000  renewed,  special  allowance  of  $500  made  to  customers. 

The  credit  sales  journal  had  two  columns,  one  for  the  billed  amounts 
and  the  other  for  the  cost  of  the  goods  sold.  The  billed  amount  was 
$8,000  and  the  cost  was  $5,000. 

The  following  statement  gives  a  summary  of  the  cash  receipts  and 
disbursements  for  January: 

Cash  received: 

Collected  from  customers   $4,000 

Collected  on   note   receivable 2  000 

Collected  on  merchandise  sold  and  not  entered  on 

sales  book  (cost  price  $500) 600 

Total  cash  received ^^^ 


ZZZ 


if-  m. 


rv  1 


■     r 


iJil 


■'I 
1. 


Bi  1^ 


In 


lit 


kn 


iiii 


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Accounting  Problems  and  Solutions, 

Cash  payments: 

Interest  on  notes  payable $45 

Salaries 3PO 

Rent 200 

Sundry  expenses 300 

Accounts  payable 5»ooo 

Total  disbursements   $^'045 

Prepare  balance  sheet,  January  31,  1908,  and  statement  of  profit  and 
loss  based  on  the  book  value  of  the  merchandise. 


Auditing. 

1.15  to  415  p.  ni»  only- 
"  The  Regents  of  the  University  shall  make  rules  for  the  examination 
of  persons  applying  for  certificates  under  this  act,  and  may  appoint  a 
board  of  three  examiners  for  the  purpose    ..." 

Laws  of  1896,  ch.  312,  §  2 

Answer  10  questions  but  no  more.  Answers  in  excess  of  the  number 
required  will  not  be  considered.  Do  not  repeat  questions,  but  write 
answers  only,  designating  by  number  as  in  question  paper.  Check  (>/) 
the  number  of  each  one  of  the  questions  you  have  answered.  Each  com- 
plete answer  will  receive  10  credits.  Papers  entitled  to  75  or  more  credits 
zuill  be  accepted. 

1.  A  public  service  corporation  that  regularly  sets  aside  from  its 
profits  a  sufficient  amount  to  provide  for  depreciation,  removes  part  of  its 
old  plant  and  replaces  it  with  a  larger  and  more  costly  one.  The  old 
plant  is  sold  for  scrap.  How  should  the  cost  of  the  new  plant  and  the 
proceeds  from  the  sale  of  the  old  plant  be  treated  in  the  accounts  of  the 
company?    Give  reasons. 

2.  How  should  an  auditor  determine  that  allowances  for  errors  in  bills 
and  credits  for  merchandise  returned  are  proper  credits  to  customers' 
accounts,  and  are  not  made  to  cover  amounts  misappropriated  by  the  book- 
keeper and  cashier? 

3.  State  briefly  how  you  would  verify  the  following  apparent  recon- 
cilement of  cash  at  the  close  of  an  audit : 

Cash  on  hand  as  per  cash  book $3.8io 

Balance  as  per  bank  pass  book $5.6io 

Add  check  of  A.  B.  not  deposited 400 

$6,010 
Deduct  checks  drawn  but  not  paid  by  bank 2,500 

$3,510 

Cash  in  drawer 300 

$3>8io 

334 


C.  P.  A.  Examination  Questions. 

4.  In  handling  large  factory  pay  rolls,  which  do  you  consider  the  better 
practice  for  the  prevention  of  fraud,  the  taking  of  receipts  from  each 
employee  for  the  amounts  paid,  or  the  establishment  of  a  good  system  of 
accounting  for  handling  pay  rolls  Give  reasons  and  explain  why  you 
think  one  method  is  better  than  the  other. 

5.  On  January  10  you  are  instructed  to  furnish  a  statement  of  assets 
and  liabilities  of  a  trading  concern  as  of  the  previous  December  31.  No 
inventory  was  taken  on  that  date  but  you  ascertain  that  the  inventory  of 
January  10  amounts  to  $7,689.25.  The  sales  billed  from  December  31  to 
January  10,  amount  to  $945,  of  which  $300  was  shipped  but  not  billed  prior 
to  December  31.  The  total  amount  was  billed  at  an  average  gross  profit 
of  25%  above  cost.  The  goods  received  between  December  31  and  January 
10  cost  $678.25.  State  fully  how  you  would  determine  the  figures  for  the 
inventory  of  December  31,  and  show  the  amount. 

6.  If  the  cash  in  bank  as  shown  by  the  cash  book  or  ledger  is  recon- 
ciled with  the  amount  shown  by  the  pass  book  or  certificate  obtained  from 
the  bank,  is  it  necessary  to  check  the  pass  book  with  the  deposits  as  shown 
by  the  cash  book?  Give  reasons  for  your  answer,  stating  the  nature  of  a 
possible  irregularity  that  might  be  disclosed  by  such  detail  checking. 

7.  The  bookkeeper  and  cashier  of  a  concern  whose  customers  make  all 
their  remittances  by  check,  fails  to  record  certain  bills  on  the  sales  books 
and  misappropriates  the  amounts.  The  remittance  checks  for  these  bills 
were  regularly  deposited  in  the  bank  and  the  checks  drawn  for  petty  cash 
include  additional  amounts  for  such  checks.  State  and  explain  two  parts 
of  an  audit  that  might  lead  to  the  detection  of  the  misappropriation. 

8.  Outline  the  procedure  for  conducting  an  examination  of  a  trust 
company,  giving  the  special  points  to  be  covered. 

9.  What  measures  should  be  taken  to  ascertain  whether  or  not  any 
notes  receivable  have  been  discounted  and  cleared  from  the  books,  not- 
withstanding the  fact  that  they  are  not  due  and  at  maturity  will  be  sub- 
ject to  demand  on  the  last  indorse r  in  case  payment  is  defaulted  by  the 
maker  ? 

10.  What  examinations  should  an  auditor  make  with  respect  to  fire 
insurance  policies  and  their  cost?  What  should  he  do  if  he  finds  that  all 
premiums  have  been  charged  to  expenses  when  and  as  vouched  or  other- 
wise entered  to  the  credit  of  the  insurance  company  or  broker?  What 
notice,  if  any,  should  an  auditor  take  of  the  fact  that  the  client  has  at 
risk  of  loss  by  fire  property  on  which  no  msurance  is  carried? 

11.  Describe  two  methods  of  procedure  by  either  of  which  might  be 
detected  the  fact  that  a  cashier  has  been  appropriating  to  his  own  use  the 
funds  of  his  employer,  but  has  been  keeping  his  cash  book  in  agreement 
with  the  funds  on  deposit  and  in  hand  through  the  process  frequently 
termed  "  kiting  remittances  of  customers,"  i.  e.,  depositing  on  one  day  all 

335 


wm 


Accounting  Problems  and  Solutions. 

checks  and  drafts  received  from  customers  on  that  day,  together  with  a 
sufficient  amount  of  cash  to  equal  the  cash  book  entries  made  on  the  same 
day  for  amounts  received  from  certain  customers  on  previous  days,  thereby 
postponing  the  entry  of  receipts  from  customers  to  an  amount  equal  to  the 
cash  misappropriated. 

12.  What  do  the  orders  issued  by  the  Interstate  Commerce  Commis- 
sion require  of  railway  companies  with  respect  to  making  provision  in  the 
accounts  for  the  replacement  of  equipment? 

13.  What  are  the  duties  of  an  auditor  as  to  examination  of  inventories 
of  finished  product,  product  in  process,  and  materials  and  supplies,  which 
have  been  taken  and  appraised  by  representatives  of  the  client,  in  case  he 
is  not  permitted  to  make  tests  for  the  purpose  of  satisfying  himself  as  to 
the  integrity  of  the  quantities  shown?  How  should  he  cover  such  a  situa- 
tion in  his  report? 

14.  If  engaged  by  a  client  some  days  after  the  close  of  the  period  for 
which  the  accounts  are  to  be  audited,  how  would  you  undertake  to  estab- 
lish the  true  cash  balance  at  the  end  of  the  stipulated  period?  State 
process  in  full. 

15.  What  are  the  duties  of  an  auditor  when  he  finds  no  charges 
made  against  maintenance  or  other  accounts  for  depreciation  of  plant? 
Should  he  be  concerned  with  the  condition  in  this  respect  which  obtains 
throughout  the  period  prior  to  the  one  to  be  covered  by  his  audit?  How 
should  he  report  to  his  client,  having  regard  for  the  possibiity  of  his 
report  being  used  for  purposes  of  obtaining  loans,  obtaining  additional 
capital  in  the  business,  or  selling  some  part  of  the  existing  capital  interests  ? 


Commercial  Law. 
9.15  a.  m.  to  12.15  P-  ni.  only. 

"The  Regents  of  the  University  shall  make  rules  for  the  examination 
of  persons  applying  for  certificates  under  this  act,  and  may  appoirit  a 
board  of  three  examiners  for  the  purpose    ..." 

Laws  of  1896,  ch.  312,  §  2 

Answer  to  questions  but  no  more.  Answers  in  excess  of  the  number 
required  will  not  be  considered.  Do  not  repeat  questions,  but  write 
answers  only,  designating  by  number  as  in  question  paper.  Check  (\/) 
the  number  of  each  one  of  the  questions  you  have  answered.  Each  com- 
plete answer  will  receive  10  credits.  Papers  entitled  to  75  or  more  credits 
will  be  accepted. 

I.  A  corporation  that  had  two  issues  of  bonds  outstanding,  namely, 
first  mortgage  bonds  dated  1890,  and  second  mortgage  bonds  dated  1900, 
acquired  the  property  of  a  competitive  corporation   subject  to   its   first 

336 


C  p.  A.  Examination  Questions. 

mortgage  bonds  dated  1902.  The  first  corporation  thereafter  issue  con- 
solidated mortgage  bonds  dated  1906,  covering  all  its  properties,  and 
retired  its  first  mortgage  bonds  dated  1890.  State  the  order  of  preced- 
ence of  the  three  outstanding  mortgages  in  case  of  liquidation,  giving  the 
position  of  each  property  as  regards  the  several  outstanding  mortgages. 

2.  Define  agency  and  mention  three  ways  by  which  the  relation  of 
agency  may  be  created. 

3.  Distinguish  between  partners  in  general  business  and  those  who  are 
merely  partners  in  common  of  a  piece  of  property. 

4.  Define  heir,  next  of  kin,  legatee,  devisee,  executor. 

5.  State  briefly  the  steps  necessary  to  be  taken  in  order  to  form  an 
ordinary  business  corporation  in  New  York  State. 

6.  Distinguish  between  statute  law  and  common  law. 

7.  Mention  two  acts  of  an  agent  that  would  bind  him  personally. 

8.  What  is  a  contract?  State  three  ways  in  which  a  binding  contract 
may  be  made. 

9.  Explain  fully  (a)  how  referees  in  bankruptcy  are  appointed,  (b) 
how  trustees  in  bankruptcy  are  appointed. 

10.  In  the  absence  of  an  express  agreement,  what  is  the  rule  for 
determining  (a)  the  duration  of  a  partnership,  (b)  the  division  of  the 
profits?  When  may  such  a  partnership  be  terminated  by  one  of  the 
partners  ? 

11.  Define  negotiable  instrument,  and  state  whether  or  not  stock 
certificates  are  negotiable.     Give  reasons. 

12.  Give  the  part  of  the  Statute  of  Frauds  that  refers  to  a  contract 
for  the  sale  of  goods. 

13.  Explain  fully  to  what  extent  one  partner  is  the  agent  of  the  firm 
with  power  to  bind  the  firm  by  his  acts. 

14.  By  the  law  of  what  place  is  a  contract  for  the  transfer  of  real 
property  governed? 

15.  When  persons  associate  themselves  together  as  a  corporation  and 
the  incorporation  is  defective  or  incomplete,  what  is  their  position  as 
against  the  creditors  of  the  corporation? 


337 


} 


I  ■ 


If 

1 1  a 


Accounting  Problems  and  Solutions. 

Theory  of  Accounts. 

New  York  Examination,  June  22.  1 909. 
9.15  a.  m.  to  12.15  P-  »"•.  only. 


« 


The  Regents  of  the  University  shall  make  rules  for  the  examination 
of  persons  applying  for  certificates  under  this  act,  and  may  appoint  a 
board  of  three  examiners  for  the  purpose    ..." 

Laws  of  1896,  ch.  312,  §  2 

Answer  10  questions  but  no  more.  Answers  in  excess  of  the  number 
required  will  not  be  considered.  Do  not  repeat  questions,  but  write 
answers  only,  designating  by  number  as  in  question  paper.  Check  (>/) 
the  number  of  each  one  of  the  questions  you  have  answered.  Each  com- 
plete answer  will  receive  10  credits.  Papers  entitled  to  7$  or  more  credits 
will  be  accepted. 

1.  Give  the  essential  principles  of  double  entry  bookkeeping  and 
state  wherein  it  differs  from  single  entry  bookkeeping.  State  also  how 
the  profit  or  loss  of  a  business  should  be  ascertained  under  each  method. 

2.  Define  (a)  funded  debt,  {b)  floating  debt,  (c)  fixed  charges.  Are 
there  any  conditions  under  which  interest  on  floating  debt  may  be  con- 
sidered and  treated  as  a  fixed  charge?    Give  reasons. 

3.  Give  different  classes  of  accounts  for  a  manufacturing  business 
and  indicate  which  of  these  classes  should  be  closed  finally  into  profit  and 
loss  account. 

4.  Describe  the  ordinary  merchandise  account  and  state  what  it  does 
not  accompish  that  is  desirable  in  accounting.  Name  proper  substitutes 
for  such  an  account. 

5.  Under  the  condition  that  a  general  mortgage,  or  trust  indenture, 
makes  provision  for  regular  payments  to  the  trustee  of  a  sinking  fund 
which,  with  accretions  from  the  investment  thereof,  is  to  provide  for  the 
redemption  of  bonds  at  their  maturity,  state  what  accounting  should  be 
made  in  respect  to  the  payments  into  such  fund  of  its  interest  or  profit 
accretions.  Indicate  what,  if  any,  distinction  should  be  made  between 
the  interest  and  the  profits.    Give  reasons. 

6.  Rule  and  title  Hve  columns  of  a  petty  cash  book  in  addition  to  the 
descriptive  column,  and  make  an  illustrative  entry  for  and  in  each  dis- 
tribution column. 

7.  State  fully  how  the  disbursements  entered  in  a  petty  cash  book 
should  be  carried  to  the  controlling  account  of  expenses  in  the  general 
ledger,  and  to  the  detail  accounts  in  the  expense  ledger. 

8.  Mention  the  principles  that  are  involved  in  cost  accounting  and 
state  what  should  be  accomplished  by  properly  applying  and  executing 
them. 

.338 


C.  p.  A.  Examination  Questions. 

9-    Give  the  difference  between  a  customer's  account  and  a  consign- 
ment account  and  state  how  each  should  be  classified  in  a  general  baW 

fnrth  ^^^  ^,^^\^^^«""ting  method  may  regular  provision  be  made 
for  the  cost  of  replacements  or  renewals  from  time  to  time  that  are  not 
m  the  nature  of  ordinary  repairs  and  that  tend  to  maintain  ort  restore 
the  value  and  efficiency  of  the  plant? 

11.  State  the  points  of  difference  between  a  statemenr  of  receipts 
and  disbursements  and  a  statement  of  revenues  and  expenses.  Under 
what  conditions  would  the  receipts  and  revenues  and  the  disbursements 
and  expenses  be  alike? 

12.  a  What  is  shown  by  a  trial  balance  ? 

b  What  is  the  character  of  accounts  contained  in  a  trial  balance? 
c  Wherein  does  a  trial  balance  differ  from  a  balance  sheet? 

'^'    I  ^u^^  ''  ^^^  advantage  of  having  a  cash  account  in  the  ledger? 
b  What  should  a  cash  account  in  the  ledger  show? 

14.    Where  do  a  joint  stock  company  and  a  copartnership  differ  in 
method  of  profit  distribution? 


IS-     Is  capital  invested  in  business  a  liability? 


Practical  Accounting — Part  I. 

1. 15  to  4.15  p.  m.,  only. 

The  Practical  Accounting  Paper  Consists  of  Part  I  and  Part  II. 

"  The  Regents  of  the  University  shall  make  rules  for  the  examination 
of  persons  applying  for  certificates  under  this  act,  and  may  appoint  a 
Doard  of  three  examiners  for  the  purpose    ..." 

Laws  of  1896,  ch.  312,  §  2 

Candidates  must  answer  question  i  and  one  of  the  others.  Answers 
m  excess  of  the  number  required  will  not  be  considered.  Do  not  repeat 
l^f'ons  but  zvrite  answers  only,  designating  by  number  as  in  question 
paper.  Check  (V)  the  number  of  each  one  of  the  questions  vou  have 
answered.  Each  complete  answer  will  receive  25  credits.  Paper's  entitled 
to  75  or  more  credits  will  be  accepted. 

Partnership  Liquidation. 

I.     A   B,  C  and  D,  partners  sharing  profits  equally,  decided  to  dissolve 
partnership,  and  on  December  31,  1908,  appoint  a  liquidator  and  transfer 
all  assets  to  him.     Fie  is  to  receive  for  his  services  5%  of  the  cash  col 
lected  by  him  in  the  liquidation  of  the  assets.    The  liquidator  is  also  to  be 

339 


m 


1 


111'' 

.'Mi 


Accounting  Problems  and  Solutions. 

allowed  the  expenses  paid  by  him  in  the  liquidation  of  the  business  as 
follows : 

Clerk  hire   ^^'^^ 

Rent 500 

Miscellaneous  expenses  700 

All  the  debts  of  the  firm  were  paid  and  all  the  notes  and  the  accounts 
were  collected  excepting  $3,200  of  worthless  and  uncollectible  accounts. 
The  furniture  and  fixtures  brought  $2,800,  and  the  merchandise  was  sold 
for  $18,000  cash.  The  balance  payable  to  partners  was  distributed  on 
December  31,  1908.  No  interest  is  to  be  figured  on  the  partner's  accounts 
or  on  the  moneys  in  possession  of  the  liquidator. 

Prepare  cash  account  of  liquidator,  statement  showing  expenses  and 
losses  in  liquidation,  and  statement  of  the  partners'  accounts.  The  bal- 
ance sheet  of  the  firm  on  December  31,  1908,  was  as  follows: 

Debits.        Credits- 
Furniture  and  fixtures  $3^500 

Merchandise  inventory 20,500 

Notes  receivable  14,000 

Accounts   receivable    38,000 

Unearned  insurance  premium  expiring  during  1908  800 

Cash   7,500 

Notes  payable  $5,ooo 

Accounts  payable  ^  '^^ 

Accrued  interest  on  notes  payable ^ 

Accrued  taxes "* 

. ,  .  16,000 

As  account   

r^,  .  8,000 

B  s  account    ' 

^,  _.  10,000 

C  s  account    J 

^,  ,  6,000 

D  s  account    

Totals    $84,300         $84,300 

2.    A  and  B  are  dealers  in  bonds  and  snare  profits  in  the  proportion  of 

A  seventy-five  (75)  per  cent. 
B  twenty-five  (25)  per  cent 

A  and  B  engage  C  to  sell  bonds,  agreeing  to  pay  him  a  salary  equal 
to  twenty-five  (25)  per  cent  of  the  net  profits  to  be  divided  between  the 
partners. 

During  the  continuance  of  C's  contract  the  firm  purchases  one  hun- 
dred thousand  dollars  ($100,000)  Waterville  Traction  Company  first  mort- 
gage 5%  bonds  on  a  3%  basis.  The  bonds  have  eighteen  (18)  months  to 
run,  interest  payable  semi-annually  (three  interest  periods). 

The  firm  holds  the  Waterville  bonds  till  maturity.  Prepare  a  state- 
ment of  the  Waterville  bond  accounts,  showing  cost,  interest  and  amorti- 
zation. 


C.  P.  A.  Examination  Questions. 

The  total  profit  to  be  adjusted  is  ten  thousand  dollars   ($10,000). 
Show  the  division  of  this  profit. 

3.  A  firm  manufacturing  but  one  grade  of  cloaks,  insured  against 
burglary,  claims  to  have  been  robbed  on  the  night  of  September   10. 

The  proof  of  loss,  filed  by  the  assured,  contained  two  items  for  600 
cloaks,  $12,000;  silk,  1,000  yards,  $1,500. 

An  inventory  of  stock  on  hand  consisting  of  cloaks,  cloth  and  silk  had 
been  taken  January  1,  amounting  to  $118,500,  the  particulars  of  which  have 
been  lost  or  destroyed. 

An  analysis  of  the  firm's  books  produced  the  following  information : 

Purchases  of  cloth,  37,500  yards  at  $1, 
"  silk,     10,000      "  $2; 

6,000  cloaks  were  manufactured,  consuming 
cloth,  40,000  yards  at  $1, 
silk,      10,000      "  $2; 

9,000  cloaks  were  sold  between  January  i  and  September  10. 

Cost  of  sales,  per  cloak,  for  material $10 

Cost  of  sales,  per  cloak,  for  labor  and  sundries 7      $17 

Inventory  September  11,    2,500  cloaks  at $17 

12,500  yards  cloth  at i 

5,000  yards  silk  at 2 

Prepare  a  report  proving  or  disproving  the  claim. 


Practical  Accounting — Part  11. 

9.15  a.  m  to  12.15  P-  in.,  only. 

"  The  Regents  of  the  University  shall  make  rules  for  the  examination 
of  persons  applying  for  certificates  under  this  act,  and  may  appoint  a 
board  of  three  examiners  for  the  purpose     ..." 

Laws  of  1896,  ch.  312,  §  2 

Candidates  must  answer  question  4  and  one  of  the  others.  Answers 
in  excess  of  the  number  required  -will  not  he  considered.  Do  not  repeat 
questions  hut  write  answers  only,  designating  hy  numher  as  in  question 
paper.  Check  (\/)  fhe  numher  of  each  one  of  the  questions  you  have 
answered.  Each  complete  answer  zvill  receive  25  credits.  Papers  entitled 
to  75  or  more  credits  will  he  accepted. 

4.  John  Dickside,  a  manufacturer's  agent  who  starts  in  business  with 
a  cash  capital  of  $15,000,  receives  from  the  manufacturer  $45,000  of  goods 
on  consignment,  subject  to  a  discount  of  5%  when  he  pays  for  the  goods. 

Dickside  pays  freight  amounting  to  $1,400  and  allows  claims  for  dam- 
aged goods  amounting  to  $1,500,  the  total  of  which  is  chargeable  to  the 
manufacturer.  He  sells  all  of  the  consigned  goods  for  a  total  of  $60,000 
and  receives  $44,000  from  his  customers,  allowing  them  in  settlement  of 
the  accounts  $400  discount  and  $600  for  defective  goods.     He  makes  the 

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Accounting  Problems  and  Solutions. 

following  payments:  $2,100  for  freight,  of  which  $1,400  is  chargeable  to  the 
manufacturer  as  noted  above;  $900  for  expenses;  he  also  pays  the  manu- 
facturer $37,950. 

Prepare  account  of  sales  to  be  rendered  to  the  manufacturer,  balance 
sheet,  statement  of  profit  and  loss  and  statement  of  capital  account. 

Consolidated  Manufacturing  Company. 

5.  Several  manufacturers  consolidate  their  interests  and  organize  the 
Consolidated  Manufacturing  Company  with  an  authorized  capital  stock  of 
$1,000,000,  divided  into  5,000  shares  of  common  stock  and  5,000  shares  of 
preferred  stock  at  $100  each  par  value. 

The  manufacturers  sell  to  the  company  all  of  their  assets  subject  to 
floating  debts  of  $115,000,  divided  into  notes  payable  $65,000,  and  accounts 
payable  $50,000,  for  the  sum  of  $1,000,000,  payable  $1,000  in  cash,  $499,000 
in  common  stock  and  $500,000  in  preferred  stock.  The  company  agrees 
to  pay  the  debts  of  $115,000.  The  active  assets  acquired  are  inventoried 
by  the  Consolidated  Manufacturing  Company  as  follows:  real  estate, 
$175,000;   machinery,   $200,000;   and  merchandise,   $155,000. 

The  patents  and  good  will  were  inventoried  at  a  sum  equal  to  the 
difference  between  the  net  cost  to  the  company  of  the  assets  acquired  and 
the  above  valuations  of  the  active  assets. 

The  company  received  $1,000  cash  for  10  shares  of  common  stock,  and 
for  the  purpose  of  providing  funds  for  working  capital  authorized  an 
issue  of  bonds  amounting  to  $300,000,  of  which  $200,000  were  immediately 
sold  as  follows :  $100,000  for  cash  at  80%,  and  $100,000  for  cash  at  par, 
with  a  bonus  of  common  stock  amounting  to  $100,000. 

For  the  purpose  of  providing  common  stock  to  be  given  as  a  bonus 
the  manufacturers  donated  $200,000  of  common  stock  to  the  treasury  of 
the  company. 

Prepare  the  journal  and  the  cash  entries  for  the  company,  covering  all 
of  the  above  transactions,  and  prepare  a  balance  sheet  of  the  company. 

6.  Acting  through  an  agent  and  trustee,  a  syndicate  acquires  the  fol- 
lowing assets  of  two  corporations  as  valued  by  appraisement  and  exam- 
ination : 

B.  Z.  Co.  R.  J.  Co. 

Timber  lands  $1,500,000  $1,000,000 

Timber  rights   700,000  800,000 

Trams  and  logging  outfits 100,000  150,000 

Mill  structures  and  equipment 200,000  250,000 

Materials   and    supplies 20,00c  30,000 

Logs 100,000  200,000 

Lumber 230,000  320,000 

Bills  and  notes  receivable 40,000  30,000 

Customers'  accounts   110,000  220,000 


$3,000,000        $3,000,000 


9£m 


C.  P.  A.  Examination  Questions. 

This  syndicate  organizes  "Lumber  Company,"  and  sells  thereto  all  of 
the  above  property  and  accounts,  excepting  the  timber  lands.  The  syndi- 
cate also  makes  a  stumpage  contract  with  the  company,  conveymg  the 
right  at  stipulated  prices  per  M  feet  to  remove  from  such  lands  all  of  the 
milling  timber.  The  syndicate  agrees  to  receive  as  consideration  $1,500,000 
of  Lumber  Company's  preferred  stock,  and  $3,000,000  of  its  common  stock. 

The  syndicate  also  organizes  "Land  Company,"  and  sells  thereto  the 
timber  lands  and  the  stumpage  contract  made  with  Lumber  Company,  and 
agrees  to  receive  as  consideration  $1,500,000  of  Land  Company's  first  mort- 
gage bonds,  and  $1,400,000  of  its  capital  stock. 

In  organizing  these  companies  the  syndicate  paid  into  the  treasury  of 
Lumber  Company  $500,000  in  cash  for  a  like  amount  of  its  common  stock 
and  into  the  treasury  of  Land  Company  $100,000  in  cash  for  a  like  amount 
of  its  capital  stock. 

Prepare  a  balance  sheet  of  each  company,  giving  effect  to  the  organiza- 
tion transactions  and  to  the  purchases  made  by  each  from  the  syndicate. 


Auditing. 

1. 15  to  4.15  p.  m.,  only. 

"The  Regents  of  the  University  shall  make  rules  for  the  exammation 
of  persons  applying  for  certificates  under  this  act,  and  may  appoint  a 
board  of  three  examiners  for  the  purpose    ..." 

Laws  of  1896,  ch.  312,  §  2 

Answer  10  questions  but  no  more.  Answers  in  excess  of  the  number 
required  will  not  be  considered.  Do  not  repeat  questions,  hut  write 
answers  only,  designating  by  number  as  in  question  paper.  Check  (\/) 
the  number  of  each  one  of  the  questions  you  have  answered.  Each  com- 
plete answer  will  receive  10  credits.  Papers  entitled  to  75  or  more  credits 
will  be  accepted. 

1.  Outline  the  duties  and  the  responsibilities  of  a  public  accountant  as 
an  independent  auditor. 

2.  State  the  process  by  which  the  balance  of  the  cash  account  may  be 
reconciled  with  the  bank  pass  book.  What,  if  any,  confirmation  of  the 
bank  pass-book  balance  should  be  obtained 

3.  What  would  be  the  duty  of  an  auditor  should  he  find  that  expendi- 
tures for  additions  and  betterments  had  been  charged  to  maintenance? 
What  would  be  his  duty  were  he  to  find  that  expenditures  for  repairs  and 
renewals  had  been  charged  to  property  investment  accounts?  Give  reason 
for  each  answer. 

4.  What  means  should  an  auditor  use  to  verify  accounts  representing 
bonds  and  stocks  owned  and  bills  and  notes  receivable,  and  to  ascertain 
whether  or  not  the  book  values  are  within  the  real  worth? 

343 


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Accouniing  Problems  and  Solutions. 

5-  What  means  should  an  auditor  use  to  verify  accounts  of  sundry 
debtors  and  to  classify  them  as  good,  doubtful  or  uncollectible?  What 
should  he  do  respecting  the  doubtful  and  uncollectible  accounts  before 
giving  a  certificate? 

6.  Is  it  necessary  that  an  auditor  should  inspect  the  minutes  of  the 
stockholders'  and  the  directors'  meetings?  If  so,  for  what  purpose?  What 
should  he  do  in  case  he  is  refused  access  to  such  records? 

7-  An  auditor  for  a  manufacturing  company  is  confronted  with  three 
conditions,  viz:  (a)  goods  shipped  "on  consignment"  and  remaining  un- 
sold, {b)  goods  shipped  to  customers  on  "sale  or  return"  and  remaining 
unsold,  (c)  goods  on  hand  at  agencies.  How  should  these  accounts  be 
valued  and  placed  in  the  balance  sheet? 

8.  In  auditing  the  books  and  accounts  of  a  company  that  regularly 
takes  notes  from  its  customers,  what,  if  any,  consideration  need  be  given 
to  whether  or  not  any  of  these  notes  have  been  discounted,  specially  if  a 
certified  balance  sheet  is  desired? 

9-  State  two  methods  by  which,  under  different  conditions,  an  auditor 
may  establish  the  actual  amount  of  capital  stock  outstanding,  and  state 
the  conditions  that  will  require  the  use  of  one  method,  and  the  conditions 
that  will  require  the  use  of  the  other  method. 

10.  Describe  the  procedure  that  should  be  followed  in  auditing  the 
books  and  accounts  of  a  stock  exchange  broker. 

11.  Is  an  ordinary  bank  check  drawn  by  the  concern  whose  books  you 
are  auditing,  to  the  order  of  the  Receiver  of  Taxes  and  properly  endorsed 
by  him,  a  sufficient  voucher  for  the  payment  of  the  taxes  of  this  concern? 
Give  reasons. 

12.  Two  concerns  in  similar  lines  contemplate  consolidating  their 
business,  you  are  requested  to  examine  the  books  of  account,  and  report 
on  matters  germane  to  the  contemplated  merger.  What  data  would  you 
probably  present  in  your  report? 

13-     Wherein  may  an  audit  differ  from  an  examination? 

14.  The  assets  of  a  concern  as  shown  by  the  books  include  real  estate 
and  accrued  interest.  In  your  audit  how  would  you  verify  the  correct- 
ness of  these  items? 

15.  In  making  a  bank  examination  would  you  commence  at  the  start 
of  the  business  day  or  at  the  conclusion  of  the  business  day?  Give 
reasons. 


344 


C.  P.  A.  Examination  Otiestions. 


Commercial  Law. 

9-15  a.  m  to  12.15  p.  m.,  only. 

"The  Regents  of  the  University  shall  make  rules  for  the  examination 
of  persons  applying  for  certificates  under  this  act,  and  may  appoint  a 
board  of  three  examiners  for  the  purpose    ..." 

Laws  of  1896,  ch.  312,  §  2 

Anszver  10  questions  but  no  more.  Answers  in  excess  of  the  number 
required  will  not  be  considered.  Do  not  repeat  questions,  but  write 
answers  only,  designating  by  number  as  in  question  paper.  Check  (W) 
the  number  of  each  one  of  the  questions  you  have  answered.  Each  com- 
plete answer  will  receive  10  credits.  Papers  entitled  to  75  or  more  credits 
will  be  accepted. 

1.  A,  in  New  York,  offers  by  letter,  merchandise  at  a  certain  price  to 
B,  in  Chicago.  B  mails  a  letter  from  Chicago  to  A  in  New  York  declin- 
ing the  offer.  The  following  morning  B  telegraphs  to  A  in  New  York  as 
follows :  "  Offer  accepted.  Ship  at  once."  This  telegram  is  received  by 
A  one  day  m  advance  of  the  receipt  of  B's  letter  declining  the  offer. 
Is  there  a  contract?     Explain  fully. 

2.  Distinguish  between  the  liability  of  a  common  carrier  for  goods 
received  by  it  for  transportation,  and  the  liability  of  a  person  for  goods 
deposited  with  him  for  safe  keeping. 

3.  A,  who  is  in  partnership  with  B,  desires  to  withdraw  from  the 
firm  because  of  B's  business  methods.  A  offers  to  sell  his  share  to  B. 
The  latter  refuses  to  purchase.  A  then  assigns  his  interest  in  the  business 
to  C,  but  B  refuses  to  accept  C  as  a  partner.     What  are  C's  rights? 

4.  Specify  three  classes  of  incumbrances  on  real  property  and  state 
how  they  may  be  ascertained. 

5-  In  New  York  State  A  procures  for  his  own  benefit,  insurance  on  the 
life  of  a  stranger,  and  B,  a  corporation,  procures  for  its  own  benefit  insur- 
ance on  the  life  of  its  president.  In  the  event  of  the  death  of  the  assured, 
can  the  amount  thereof  be  collected  in  each  case?  Explain  the  rule  on 
which  the  law  is  founded. 

6.  A  borrows  money  from  B  and  mortgages  his  house  as  security. 
A  then  sells  and  transfers  this  property  to  C  who  pays  to  A  the  difference 
between  the  value  of  the  property  and  the  amount  of  the  mortgage.  The 
mortgage  is  unpaid  at  maturity,  B  forecloses  it  and  the  property  is  sold  for 
less  than  the  amount  of  the  mortgage.  Can  B  collect  the  difference  from 
either  A  or  C?    Explain  fully. 

7.  Describe  the  Interstate  Commerce  Commission,  giving  its  powers. 
State  fully  how  it  gets  its  constitutional  rights  of  jurisdiction,  and  on  what 
railroads  it  may  exercise  its  powers. 

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Accounting  Problems  and  Solutions. 

8.  Describe  the  following  stocks  and  securities  issued  by  corporations ; 
state  the  assets  securing  them  and  their  order  of  preference  in  the  liquida- 
tion of  a  corporation:  (a)  preferred  stock,  (b)  collateral  trust  bonds,  (c) 
first  mortgage  bonds,  (d)  coupon  notes,  {e)  consolidated  mortgage  bonds. 

9.  As  collateral  security  for  a  debt  amounting  to  $7,000,  which  is 
overdue  and  unpaid,  A  holds  a  block  of  stock  the  market  value  of  which 
is  about  $5,000;  what  remedies  has  he? 

la  State  the  procedure  in  New  York  State  by  which  public  service 
corporations  may  issue  bonds. 

11.  Wherein  do  the  rights  of  individual  creditors  and  partnership 
creditors  differ  in  respect  to  partnership  funds? 

12.  The  president  of  a  company  holds  office  for  five  years  and  renders 
considerable  active  service  without  asking  for  or  receiving  compensation. 
A  new  management  takes  possession  of  the  affairs  of  the  company  and 
elects  a  new  president.  The  former  president  claims  that  he  is  entitled  to 
an  allowance  for  salary.  Would  an  action  for  compensation  for  the  serv- 
ices be  sustained?    Give  reasons. 

3.  A  sells  goods  to  a  partnership  firm  on  the  customary  terms  in  his 
line  of  business,  namely,  four  months'  credit.  The  goods  are  delivered  as 
per  contract  and  are  used  by  the  firm,  but  when  the  amount  is  due,  pay- 
ment is  refused  on  the  ground  that  an  agreement  existing  between  the 
partners  stipulates  that  no  one  of  the  partners  shall  have  authority  to  bind 
the  firm  to  a  time  purchase  contract,  and  that  all  purchases  shall  be  made 
for  ca«?h.  A  knew  of  this  agreement.  Can  he  recover?  Explain  the 
theory. 

14.  Define  a  corporation.  Who  may  dissolve  it  and  under  what 
conditions  ? 

15.  If  the  stock  of  a  company  is  transferred  before  it  is  fully  paid  for, 
will  the  original  stockholder  be  liable  for  the  unpaid  balance?  Explain 
fully. 


■m  I  jni^ 


Commercial  Law. 

Michigan  Examination,  July,    1909. 
Time  allowed  4  hours :  8.30  a.  m.  to  12.30  p.  m. 
yS  credits  out  of  a  possible  100  necessary  to  pass. 

I.  (a)  What  is  the  source  of  the  bankruptcy  law  of  the  United  States? 
(b)  What  are  the  exceptions  to  the  rule  that  on  the  bankruptcy  of  a  firm, 
and  of  an  individual  member  of  that  firm,  the  joint  and  separate  creditors 
cannot  prove  in  competition  with  one  another?  (c)  What  is  the  jurisdic- 
tion and  power  of  a  referee  in  bankruptcy,  and  what  compensation  is  a 
referee  in  bankruptcy  entitled  to? 

346 


C.  P.  A.  Examination  Questions. 

2.  (a)  Has  the  master  of  a  ship  the  power  to  bind  the  owner  when  he 
signs  a  bill  of  lading  and  the  goods  are  not  yet  on  board?  Give  reason 
for  your  answer,  (b)  What  is  the  difference  between  "registry"  and 
"  enrollment "  in  the  law  of  shipping  ? 

3.  (o)  Name  and  define  the  three  (3)  most  important  forms  of  guar- 
anty. (&)  Is  a  guaranty  negotiable?  State  reason  for  answer,  (c)  What 
are,  and  what  are  not,  good  defenses  to  a  suit  to  enforce  a  call  for  unpaid 
subscriptions  to  the  stock  of  a  corporation?  (d)  What  is  the  difference 
between  the  capital  of  a  corporation  and  its  capital  stock?  Explain  in 
detail. 

4.  (a)  In  what  proportion  to  the  actual  paid  up  capital  of  a  Michigan 
corporation  may  preferred  stock  be  issued?  {b)  What  must  be  expressed 
on  the  face  of  preferred  stock  certificates  as  regards  their  redemption,  etc.? 
(c)  When  cumulative  dividends  are  permitted,  what  is  the  maximum  rate 
per  cent,  per  annum?  (d)  Does  the  preferred  stock  vote  the  same  as  the 
common  stock?  (e)  Under  what  conditions  would  preferred  stock  have 
equal  rights  with  the  common  stock  in  the  control  of  a  corporation?  (/") 
Is  the  transfer  upon  the  books  of  a  corporation  necessary  to  complete  the 
assignee's  ownership  of  a  stock  certificate  ?    Explain  fully. 

5.  In  what  three  (3)  ways  may  an  employee  seek  redress  for  an  em- 
ployer's improper  breach  of  contract  for  a  fixed  salary  payable  at  regular 
intervals  ? 

6.  (a)  Distinguish  the  difference  between  an  open  and  stated  account. 
(b)  To  what  extent  is  an  account  stated  conclusive?  (c)  Does  the  mere 
rendering  of  an  account  make  it  an  account  stated?  (d)  On  what  grounds 
may  an  account  stated  be  opened?  (e)  Give  the  number  of  years  after 
which  the  various  kinds  of  actions  are  barred  by  the  statute  of  limitations 
in  Michigan  on  judgments,  sealed  notes,  justice  judgments,  notes  receiv- 
able, and  open  accounts.  (/)  Is  Michigan  one  of  the  states  where  the 
seal  implies  a  consideration  only  where  there  is  no  evidence  to  show  that 
there  was  no  consideration? 

7.  (a)  What  is  a  contract?  (b)  How  is  a  contract  made?  (c)  What 
are  some  kinds  of  contracts  that  must  be  under  seal?  (d)  Which  con- 
tracts if  made  on  Sunday  are  void,  and  which  are  not  void?  (e)  Give 
examples  of  contracts  which  are  illegal  at  common  law.  (ODraw  up  a 
contract  in  legal  form  between  a  company  and  a  branch  house  manager, 
covering  the  period  of  employment,  salary,  the  various  duties,  and  other 
terms,  etc.,  in  accordance  with  the  following  information.  Salary  $5,000 
per  annum,  payable  semi-monthly,  the  company  agreeing  to  allow  the 
manager  a  one  per  cent,  commission  as  additional  compensation  at  the 
end  of  the  year  on  all  net  business  handed  through  the  branch  in  excess  of 
$500,000.  Further,  if  the  expense  of  doing  business  at  the  branch  shall 
be  less  than  10%  of  the  gross  sales,  then  the  manager  is  to  receive  one- 
third  of  such  saving  in  the  expense  of  operating.     This  agreement  may  be 

347 


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Accounting  Problems  and  Solutions. 

terminated  at  any  lime  upon  written  notice  being  properly  served.  This  is 
not  to  be  an  agency  arrangement.  An  arbitration  clause  in  case  of  a  dis- 
pute in  settlement,  and  any  other  provisions  that  you  may  deem  necessary 
to  fully  protect  both  the  company's  and  manager's  interests,  (g)  What 
is  an  agreement?  (h)  What  is  the  distinction  between  a  good  considera- 
tion and  a  valuable  consideration?  (i)  What  forms  may  consideartion 
take? 

8.  (a)  What  is  a  patent?  (b)  What  is  a  copyright?  (c)  What  is 
a  trade  mark?  (d)  How  are  they  each  obtained?  (e)  What  is  necessary 
in  their  assignment?  (0  Were  "trade  marks"  known  to  the  common 
law?  (g)  How  do  they  differ  from  patents  and  copyrights  in  this  respect? 
(/»)  How  may  a  patent-right  be  lost?  (i)  What  is  a  "disclaimer"  and  a 
"caveat?" 

9.  (a)  What  is  meant  by  the  "doctrine  of  contribution?"  (b)  Ex- 
plain the  doctrine  of  exoneration?  (c)  What  is  the  doctrine  of  mar- 
shalling securities? 

10.  (a)  How  is  a  partnership  formed?  (&)  What  is  the  real  test 
of  the  existence  of  a  partnership?  (r)  What  is  a  nominal,  a  select,  a 
dormant,  or  an  ostensible  partner?  (d)  Can  the  firm  of  A  &  B  sue  the 
firm  of  A  &  C,  there  having  been  business  dealings  between  the  two  firms  ? 
{e)  How  may  a  partnership  be  terminated? 


Auditing. 

Time  allowed :  5  hours,  i  p.  m.  to  6  p.  m. 
75  credits  out  of  a  possible  100  necessary  to  pass. 

1.  What  is  the  average  date  of  the  following:  (a)  $114  due  April  10; 
$140  due  April  26;  $320  due  May  22;  $976  due  June  6?  (b)  June  3,  $375 
on  30  days'  time;  June  28,  $420  on  60  days'  time;  July  16,  $560  on  four 
months'  time;  Septemebr  4,  $228  on  90  day's  time?  (c)Dr.  May  16,  $437, 
Cr.  May  23,  $400;  Dr.  May  31,  $324,  Cr.  June  16,  $300. 

2.  (a)  If  instructed  to  carry  out  a  monthly  audit  by  the  auditing  com- 
mittee of  a  club,  what  steps  would  you  take  to  ascertain  whether  any  pecu- 
lations by  the  servants  or  stock  clerks  were  being  carried  on  in  connection 
with  the  kitchen  and  cafe?  (b)  What  system  would  you  recommend  to 
prevent  dishonesty  on  the  part  of  the  various  employes,  from  the  time 
orders  are  placed  for  buying  the  provisions  and  supplies,  until  the  accounts 
of  members  are  paid  to  the  cashier  and  banked  ? 

3.  (a)  A  man  invests  $2,000  in  3%  stock  at  84,  and  $5,000  in  4%  at  96. 
After  three  years  he  sells  the  former  at  72,  and  the  latter  at  loi.  What 
rate  of  interest  has  he  received  during  the  three  years  on  his  investment? 
(b)  And  to  what  extent  has  the  value  of  his  capital  changed?  Show  by 
figures  how  you  worked  out  the  answers. 

348 


C.  p.  A.  Examination  Questions. 

4.  An  American  firm  has  an  extensive  trade  with  Spanish  and  English 
customers,  to  whom  goods  are  invoiced  in  Spanish  and  English  currency, 
and  payments  are  accepted  made  by  bills  in  those  countries.  This  firm's 
principal  business  is,  however,  in  the  United  States.  Explain  in  what 
manner  you  would  arrange  the  books  to  be  kept,  and  the  titles  of  any  spe- 
cial accounts  that  might  be  necessary  to  keep. 

5.  Jones  &  Brown  are  partners,  sharing  profits  equally.  Their  capital 
as  it  appears  on  the  books  of  the  partnership  on  the  date  they  dissolve 
partnership  is,  Jones  $2,000,  and  Brown  $500.  The  total  amount  owing  by 
the  firm  is  $5,000,  which  includes  $1,000  due  to  Jones  on  a  loan,  and  $500 
due  to  Brown  on  a  loan.  The  whole  of  the  assets  of  the  firm  reahze 
$6,000.  Prepare  your  own  accounts  and  supply  details  for  closing  up  the 
partnership,  showing  the  position  in  which  the  partners  stand  with  each 
other. 

6.  How  would  you  deal  in  a  life  insurance  company's  accounts  with 
premiums  received,  bearing  in  mind  the  fact  that  premiums  are  always  paid 
in  advance?     Should  you  apportion  them?     Explain  fully  in  your  answer. 

7.  How  would  you  proceed  with  the  audit  of  the  accounts  of  a  corpora- 
tion whose  capital  is  invested  in  the  entire  capital  stock  and  bonds  of  a 
number  of  other  companies,  to  arrive  at  a  correct  result  as  to  the  profits 
of  the  corporation.  Answer  fully,  giving  reasons  for  your  actions,  etc. 
(b)  When  would  be  the  proper  time  for  declaring  dividends? 

8.  A  certain  issue  of  $100,000  4%  bonds  is  dated  September  i,  1908, 
and  interest  begins  at  that  date,  but  interest  is  payable  on  February  i  and 
August  I,  and  the  principal  (with  four  months'  interest)  is  payable 
December  i,  1912.  What  is  the  value  of  these  bonds  on  a  3.60  basis  at 
the  date  of  issue?  What  is  their  value  at  the  same  basis  if  purchased  on 
December  i,  1908?  (Note  that  you  are  interpolating  into  a  five-month 
period,  not  a  six-month,  in  the  beginning). 

9.  A  wool  dealer's  business  consists  of  the  following  transactions: 
(a)  buying  and  selling  on  his  own  account;  (b)  receiving  on  consignment 
and  selling  for  commission;  {c)  consigning  to  other  dealers  for  sale  for 
his  own  account.  All  wool  received,  whether  purchased  or  consigned,  is 
charged  to  merchandise  account,  and  credited  to  the  vendors  or  consigners, 
and  all  wool  disposed  of,  whether  consigned  or  sold,  is  credited  to  mer- 
chandise account  and  charged  to  the  purchasers  or  consignees.  The  prices 
in  the  pro  forma  invoices  of  consigned  goods  invariably  differ  from  prices 
shown  in  the  account  sales  rendered  to  consignors  or  recived  from 
consignees.  At  the  end  of  the  year  he  prepares  a  statement  treating  all 
wool  in  his  possession  as  inventory  and  credits  merchandise  account  there- 
with ;  all  debit  balances  on  account  of  goods  sold  or  consigned  by  him  as 
accounts  receivable ;  and  all  credit  balances  on  account  of  goods  purchased 
or  consigned  to  him  as  Habilities.  The  accounts  are  clerically  correct. 
You  are  asked  to  audit  his  books  and  certify  to  the  accuracy  of  his  state- 
ment. How  would  you  proceed  to  do  this?  Write  a  report  thereon  not 
exceeding  two  hundred  words. 

349 


■■i  *■ 


I 


! 


i 


"f 


III 


Accounting  Problems  and  Solutions. 

lo.  How  would  you  proceed  in  making  an  audit  of  an  estate,  including 
principal,  personality,  and  real  estate,  and  real  estate  income,  where  the 
interests  of  distributees  include  legacies  to  lineals  and  collaterals,  annuities, 
widow's  dower,  life  estates,  and  estates  in  remainder.  Give  full  particu- 
lars, with  an  illustration,  supplying  your  own  figures. 


Theory  of  Accounts. 

Time  allowed  4  hours.  8.30  a.  m.  to  12.30  p.  m. 
/5  credits  out  of  a  possible  100  necessary  to  pass. 

1.  Describe  in  detail  your  understanding  of  and  the  principles  under- 
lying the  following  systems  of  wages,  and  their  influence  on  the  labor 
efficiency  in  a  large  manufacturing  plant:  (a)  Day  rates,  (b)  pieces  rates, 
(c)  differential  piece  rates,  (d)  premium  plan,  (e)  bonus  plan,  and  (f) 
efficiency  system. 

2.  Complete  the  following  chart  of  a  bank's  officers  and  employes,  by 
setting  forth  briefly  the  duties  of  the  various  clerks  and  the  different  books 
and  records  kept  by  each,  showing  their  relationship  to  each  other,  etc. 
Cashier,  receiving  teller,  paying  teller,  exchange  teller,  loan  clerk,  discount 
clerk,  coupon  and  transfer  clerk,  stock  and  bond  clerk,  and  general  book- 
keeper. Give  any  further  information  with  which  you  may  be  familiar 
concerning  banking  routine. 

3.  (a)  Describe  how  the  officers  or  "insiders"  of  a  corporation  could 
"  milk  "  the  corporation  to  their  own  personal  benefit,  outlining  the  usual 
methods  employed  in  such  cases  for  the  purpose  of  giving  the  stockholders 
and  the  public  a  wrong  impression  of  a  corporation's  condition,  (b)  How 
should  money  received  on  account  of  stock  sub'^criptions  and  forfeited  by 
non-payment  of  installments  as  they  mature,  be  treated  on  the  books  of  the 
corporation  ? 

4.  What  books  and  records  are  essential  to  the  use  ot  the  double- 
entry  system  in  (a)  manufacturing  business,  (b)  merchandismg  business, 
(c)  insurance  business,  and  (d)  commission  business.  Give  list  of  books 
and  description  of  their  use. 

5.  Give  all  the  stages  in  closing  the  books  at  the  home  office  of  a  mer- 
cantile corporation  operating  branch  houses  throughout  the  country,  from 
the  time  the  books  are  fully  posted  and  reports  are  all  received  to  the  com- 
pletion of  the  annual  financial  statement. 

6.  If  a  bond  reads  at  4%,  but  the  amount  which  will  be  received  is 
1.05  of  the  nominal  par,  what  is  the  actual  percentage  of  cash  income? 

7.  (a)  Suggest  the  various  methods  or  plans  by  which  an  inventory  may 
be  corroborated  or  impeached,     (b)     How  would  you  adjust  a  fire  loss 

350 


C.  P.  A.  Examination  Questions. 

where  no  inventory  had  ever  been  taken  and  no  costs  of  sales  recorded? 
(c)  Describe  the  practical  application  in  fire  insurance  of  the  co-insurance 
clause,  (d)  the  average  clause,  (e)  the  three-fourths  value  clause,  (f) 
the  three-fourths  loss  clause,  and  (g)  the  use  and  occupancy  form. 

8.  (a)  If  the  value  of  the  property  insured  is  $10,000  and  the  actual  in- 
surance at  the  time  of  the  fire  is  80%,  what  would  be  the  settlement  if  the 
loss  was  50%  of  the  total  value,  and  (b)  ii  the  property  value  was  $10,000 
with  an  80%  co-insurance  clause  and  the  actual  insurance  in  force  at  the 
time  of  the  fire  was  $6,000,  what  would  be  the  owner's  deficiency  if  the 
loss  was  50%  of  the  total  value?  (c)  How  much  if  the  loss  was  only  40% 
of  the  total  in  question  (b)? 

9.  You  are  engaged  to  install  a  complete  factory  cost  and  accounting 
system  in  a  large  manufacturing  plant.  Describe  the  various  steps  in  the 
handling  of  such  a  proposition,  and  show  by  charts,  the  accounts  (properly 
grouped,  etc.,)  the  departments  (productive  and  non-productive),  logically 
arranged,  and  give  a  list  of  the  various  forms,  etc.,  that  would  be  required 
to  record  the  factory  operations  to  intelligently  handle  them  from  an 
accounting  viewpoint  as  an  integral  part  of  the  accounting  system. 

10.  Name  the  various  methods  of  distributing  the  overhead  or  indirect 
expense  in  a  factory  so  as  to  apportion  the  same  equitably  to  the  cost  of  the 
articles  manufactured,  describing  briefly  the  different  advantages  of  each 
method  in  various  kinds  of  business. 


Practical  Accounting. 

Time  required,  5  hours,     i  p.  m.  to  6  p.  m. 

Answer  questions  i  and  2  and  two  of  the  others,  but  no  more.    Answers 
in  excess  of  the  number  required  will  not  be  considered. 

I.  The  Adams  Company  was  organized  July  i,  1905,  under  the  laws  of 
the  State  of  Michigan,  with  an  authorized  capital  stock  of  $100,000,  divided 
into  1,000  shares  of  $100  each.  Their  operations  have  not  been  very  suc- 
cessful Their  stock  has  never  paid  any  dividends,  and  their  capital,  at 
present,  is  impaired.  The  stockholders  at  a  meeting  decided  to  reorganize 
the  company,  and  for  that  purpose  a  committee  was  appomted  to  have  the 
properties  appraised  and  to  take  such  measures  as  they  would  deem  advis- 
able.   The  condition  of  affairs  as  disclosed  by  the  books  is  as  follows: 

Real  Estate  and  Buildings $35,000 .00 

Plant  and  Machinery 28,000. 00 

Equipment  and  Fixtures 14,000 .  00 

Tools 3,000.00       $80,000.00 


351 


•«Sl.l? 


Accounting  Problems  and  Solutions. 


t 


Inventories : 

Finished  Goods $27,500.00 

Raw  Material 1 1 ,500 . 00 

Supplies 5,300.00          44,300.00 

Organization  Expenses $8,000 .00 

Less  amount  written  off 3,000  .00  5,000 .  00 

Capital  Stock $100,000.00 

Treasury  Stock 5,000 .  00 

Bonded  Indebtedness 25,000 . 00 

Treasury  Bonds 5 ,000 .  00 

Accounts  Receivable 87,700 . 00 

Notes  Receivable 1 7,800 .  00 

Cash 3,200.00 

Notes  Payable 26,200.00 

Accounts  Payable 82,000.00 

Loans  Payable 26,000 .00 

The  Baker  Company  is  a  corporation  also  organized  under  the  laws  of 
this  state,  and  in  existence  for  the  last  five  years.  The  capital  stock  of  this 
company  is  $150,000,  divided  into  1,500  shares  of  $100  par  value.  The 
company  has  paid  an  annual  dividend  of  9%  since  organization,  and  their 
yearly  profits  were  as  follows: 

ist    year $34,500.00 

and  year 33,000 . 00 

3rd  year 35,000.00 

4th  year 35,500.00 

5th  year 30,500 .  00 

Having  learned  of  the  financial  embarrassment  of  the  Adams  Company, 
and  desiring  to  get  possession  of  their  buildings  and  real  estate,  which  are 
adjacent  to  the  B.  Co.'s  property,  they  propose  to  the  committee  of  the 
Adams  Company  that  the  two  corporations  be  amalgamated.  A  consoHda- 
tion  agreement  was  drawn  up,  containing  among  others  the  following  pro- 
visions : 

(i)  The  charter  of  the  Baker  Co.  is  to  be  amended,  and  the  name 
changed  to  that  of  the  Consolidated  Manufacturing  Company,  the  latter  to 
absorb  the  stock  of  the  Adams  and  Baker  Company  respectively. 

(2)  The  current  assets  of  the  Adams  Company  are  to  be  taken  over 
at  their  book  value,  except  that  a  reserve  of  5%  be  deducted  on  notes  and 
accounts  receivable. 

(3)  The  fixed  assets  are  to  be  taken  over  on  the  following  basis: 

(0)  Real  estate  and  buildings  at  15%  increase  of  book  value. 

(fc)  Plant  and  machinery  at  85%  of  book  value. 

(f)  Equipment  fixtures  at  80%  of  book  value. 

(d)  Tools  at  60%  of  book  value. 

{e)  Organization  expenses  are  not  to  be  considered  at  all. 

352 


• 


III' '    » 


C.  P.  A.  Examination  Questions. 


(4)  The  Consolidated  Manufacturing  Company  to  assume  the  liabili- 
ties of  the  Adams  Company  to  the  public,  and  to  issue  to  the  latter  capital 
stock  for  the  excess  of  the  assets  over  the  liabilities.  If  there  be  any 
fractional  sum  of  $100  the  Adams  Company  is  to  receive  a  full  $100  share 
for  such  fractional  part. 

(5)  The  assets  of  the  Baker  Company  are  to  be  taken  over  at  their 
book  value,  and  in  addition,  the  company  is  also  to  be  given  stock  for  the 
good  will,  the  latter  to  be  based  on  the  last  three  years'  net  profits  and  is  to 
be  60%  of  that  total. 

(6)  The  Consolidated  Manufacturing  Company  is  to  provide  for  a 
bond  issue  of  $100,000  with  which  it  is  to  take  up  the  outstanding  bonds  of 
the  Adams  Company,  and  to  sell  the  balance  in  order  to  raise  cash  funds. 
The  stockholders  of  each  respective  company  to  have  the  privilege  of 
taking  the  bonds  at  96. 

(7)  The  Consolidated  Manufacturing  Company  to  assume  all  the 
liabilities  to  the  public  of  the  Baker  Company. 

Assuming  that  the  last  balance  sheet  of  the  Baker  Company,  which  is 
taken  to  present  the  true  condition  of  this  concern,  discloses  the  following 
state  of  affairs: 


353 


Accounting  Problems  and  Solutions. 


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f  C.  p.  A.  Examination  Questions. 

You  are  required  to  give: 

(a)  Closing  entries  for  the  Adams  Company. 

(b)  Journal   entries    for   the    Consolidated   Manufacturing   Company 

covering  capitalization,  issue  of  bonds— taking  for  granted  that  the  stock- 
holders of  the  Adams  and  Baker  Companies  took  advantage  of  their  rights 
with  regard  to  purchase  of  bonds— and  also  payments  to  be  made  to  the 
state  and  county  authorities. 

(c)  Balance  sheet  of  the  Consolidated  Manufacturing  Company  plac- 
ing the  assets  of  Adams  Company  at  the  value  as  shown  by  the  latter's 
books,  crediting  the  difference  between  the  price  paid  for  them  and  the 
revaluation  to  good-will  paid  to  the  Baker  Company. 

2.  X,  Y,  &  Z,  foundry  men,  unable  to  meet  their  obligations,  suspend 
payment  January  i,  1908,  and  appoint  a  trustee  to  realize  and  liquidate 
ior  the  benefit  of  their  creditors.  The  books  showed  the  following  assets 
and  liabilities: 


Assets: 

Land  and  Buildings 

Machinery  and  Tools . . . 
Furniture  and  Fixtures . 
Materials  and  Supplies. . 

Notes  Receivable 

Accounts  Receivable  . .  , 
Cash 


Liabilities: 

$125,000  Mortgage     on     Foundry 

75,000         Premises $100,000 

10,000     Notes  Payable 135,000 

95,000     Accounts  Payable 105,000 

15,000  Interest  Accrued  on  Mtge  1,250 

115,000  Taxes     accrued     (esti- 

450         mated) 835 

Capital 93,365 

^435.450  $435,450 


The  trustee's  cash  receipts  and  payments  during  the  year  1908  were 
as  follows: 


Receipts: 

Notes   Receivable    (Out- 
standing January   i, 
1908) $15,000 

Accts.   Receivable   (Out- 
standing   January    i. 


Payments: 

Notes  Payable $2  5 ,000 

Accounts  Payable 3  5 ,000 

Interest  on  Mortgage  one 

year  at  5% 5,000 

Taxes  for  year  1907 865 


1908) 106,500     Purchase  of  Material  and 


Cash  Sales 

Notes  Receivable  (Con- 
tracted during  1908) . . 

Accts.  Receivable  (Con- 
tracted during  1908) . . 


5,435         Supplies 98,000 

Labor 135,000 

13,500     General  Expenses 45,000 

Interest  on  bills  payable 

212,000         to  Sept.  30,  '08  at  5%.  2,300 


Total  Receipts $45  2 ,43  5 


Total  Payments. 


S346,66s 


355 


«y« 


ft 


Accounting  Problems  and  Solutions. 

Other  transactions  were  as  follows: 

Sales  on  Credit $335,000 . 00 

Bad  Debts  written  off  accounts  prior  to  Jan. 

I,  1908 $8,000.00 

Bad  Debts  written  off  accounts  subsequent 

to  Jan.  I,  1908 2,000.00         10,000.00 

Discounts  and  allowances  to  Customers'  Ac- 
counts prior  to  January  i ,  1908 500 .  00 

Discounts  and  allowances  to  Customers'  Ac- 
counts subsequent  to  January  i.  1908 ....  300 .00  800 .00 

Notes  Received  from  Customers 20,000 . 00 

Notes  given  to  Creditors  (i  10,000  being  renewals) 180,000 .00 

Inventory  of  Materials,  December  31,  1908 92,000 .00 

At  the  end  of  the  year  the  business  was  returned  to  the  owners. 
Prepare  realization  and  liquidation  account,  and  balance  sheet. 

3.  A  company  is  formed  under  the  laws  of  Mexico  to  take  over  and 
work  certain  mining  properties.  At  the  end  of  one  year  the  company  is 
found  to  possess: 

Mining  Lands $484,675  .  48 

Buildings  and  Improvements 20,499  •  76 

Machinery 25,612  .88 

Cash  on  hand  and  in  Bank 24,612  .50 

Silver  Bullion 85,209  .  50 

Ore  in  Dump 13,680.00 

Merchandise 5,420.80 

Fuel,  Oil,  Etc 679  .  20 

The  Company  Owes: 

On  Open  Accounts 3.890 . 1 2 

On  Account  of  Pay  Rolls 400 .  00 

Note  due  in  six  months  with  interest  at  6% 25,000 .00 

Capital  Stock  (full  paid)  is 500,000 .00 

Set  up  balance  sheet. 

As  the  greater  part  of  the  capital  invested  in  the  above  undertaking  is 
furnished  by  citizens  of  the  State  of  Michigan,  a  corporation  h  organized 
under  the  laws  of  this  state  to  acquire  a  majority  of  the  capital  stock  of  the 
Mexican  company  and  thus  to  control  its  affairs.  The  capital  is  fixed  at 
$200,000,  all  of  which  is  subscribed  for  and  paid  in  at  120.  An  issue  of 
$200,000  in  20  year,  6%  gold  bonds,  is  authorized  and  sold  at  no.  The 
new  company  purchases  4,000  shares  of  the  capital  stock  of  the  Mexican 
company,  par  value  $100  per  share,  Mexican  silver  at  150.  At  the  end  of 
one  year  a  dividend  of  15%  is  received  on  these  shares.  The  taxes  and 
expenses  of  the  company  are  $8,640.  Set  up  a  profit  and  loss  statement 
and  balance  sheet,  assuming  the  value  of  the  Mexican  dollar  to  be  50  cents, 
gold,  and  show  how  cash  balance  is  arrived  at. 

356 


C,  P.  A.  Examination  Questions. 

4.  On  January  i,  the  Fairview  Real  Estate  Association  was  incor- 
porated, the  capital  subscribed  and  paid  in  being  $30,000,  divided  into  30 
shares.  The  Association  purchased  improved  property  for  speculative 
purposes,  paying  cash  $30,000,  and  giving  a  first  mortgage  lor  $60,000 
at  6%. 

The  Association  organized  and  incorporates  on  the  same  day  the  Fair- 
view  Club  with  30  proprietary  members  (being  the  stockholders  of  the 
real  estate  association)  and  30  associate  members  who  have  no  proprietary 
interest,  but  enjoy  all  privileges  without  incurring  any  of  the  liabilities. 
The  annual  dues  are  $100  a  year,  paid  by  all  in  advance. 

The  Association  leases  to  the  club  the  property  aforesaid,  the  considera- 
tion in  lieu  of  rent  being  the  payment  by  the  club  of  all  sums  for  taxes, 
betterments,  interest,  fixtures,  furniture,  etc. 

The  proprietary  members  are  assessed  $300  each,  and  by  a  subsequent 
resolution  of  the  Association  are  to  receive  credit  therefor,  with  interest 
at  6%.     Five  members  fail  to  pay  the  assessment. 

The  Association  having  executed  a  contract  for  the  sale  of  the  property 
for  $110,000,  the  club  disbands  at  the  end  of  the  year. 

The  club  expenditures  for  the  year  were  as  follows:  Taxes,  $1,800; 
interest  on  mortgage,  $3,600;  repairs,  $1,000;  improvements,  $3,000;  furni- 
ture and  fixtures,  $2,000;  general  expenses,  $500;  help  (sundry  employes), 
$1,600. 

There  were  house  charges  against  the  members  $500,  which  were  sub- 
sequently collected ;  and  there  were  payable  book  debts  of  $4,000.  A  sec- 
ond assessment  of  $100,  called  for  to  pay  off  the  club  debts,  was  paid  by 
the  proprietary  members  of  the  Association. 

Frame  journal  entries,  raise  and  close  accounts  on  the  Association 
and  the  club  books,  and  prepare  balance  sheet  and  revenue  account  for 
each. 

5.  The  ledger  of  Jenkins  and  Brown  at  the  end  of  the  fiscal  year 
showed  the  following  balances : 

H.  Jenkins $18,950.00 

A.  Brown 18,950.00 

Cash $3,000 .00 

Bills  Receivable 750 . 00 

Book  Accounts  Receivable 18,000 .  00 

Inventory :    Raw  Material $8,000 .  00 

Labor 12,000.00 

Manufactured  Goods     6,500.00  26,500.00 

Accounts  Payable 2,350 .00 

Bills  Payable siooo . 00 

$48,250.00       $48,250.00 

Pursuant  to  agreement  each  partner  had  drawn  $2,800  as  salary  which 
had  been  charged  as  an  expense  to  the  business.  The  profits  and  losses 
were  then  divided  equally.  The  results  for  the  period  just  ended  showed 
a  net  loss  of  $2,500  which  the  partners  were  unable  to  understand  in  view 

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of  the  fact  that  they  had  done  a  business  of  $100,000,  ^nd  according  to 
their  cost  calculation  this  should  have  produced  a  profit  over  and  above 
their  salaries.  An  accountant  was  called  in  to  explain  the  unaccountable 
loss.  An  analysis  of  the  merchandise  and  profit  and  loss  accounts  (into 
one  or  the  other  of  which  the  nominal  accounts  had  all  been  closed), 
showed  the  following  summary: 

Inventory  at  commencement  of  period: 

Raw  Material $9,000 . 00 

Labor 13,000.00 

Manufactured  Goods 22,000 . 00 

Purchases  during  Period $20,000 . 00 

^^t)or 35,000.00 

Wages 4,000 .  00 

Traveling  Expenses,  Commissions,  etc 10,500 .00 

Salaries 2,000 .00 

I^^Jit 1,500.00 

Bad  Debts 2,550.00 

Sundry  Depreciation 600 .  00 

Discounts  and  Interest 250 . 00 

Gross  Sales 100,000 .00 

Return  Sales 3,000 . 00 

x\n  inspection  of  their  cost  records  showed  the  following  consumption : 

Material $18,000.00 

Labor 32,000 .00 

Prepare  accounts  that  will  give  expression  to  their  transactions  and 
thereby  indicate  any  discrepancy  that  the  above  figures  may  reveal. 

6.  The  Blank  Company  was  duly  organized  as  a  corporation  under  the 
laws  of  the  State  of  New  York,  for  the  purpose  of  manufacturing  and 
selling  a  staple  article,  with  a  capital  stock  of  $28,000,000,  consisting  of 
280,000  shares  of  the  par  value  of  $100  each ;  of  the  said  capital  $14,000,000 
is  preferred  stock  and  $14,000,000  common  stock. 

To  further  the  purposes  of  the  corporation,  the  property,  business, 
assets  and  good  will  of  certain  corporations,  firms  and  individuals,  were 
purchased  from  Brown  &  Jones,  bankers,  at  an  agreed  valuation.  The 
total  appraised  valuation  of  the  properties  purchased  was  $24,000,000,  for 
which  the  corporation  was  to  pay  $24,720,000,  $12,360,000  in  preferred  stock 
and  $12,360,000  in  common  stock  which  was  issued. 

Cash  was  received  from  sundry  persons  for  subscription  for  10  shares 
of  common  stock,  $1,000,  and  to  provide  the  company  with  working 
capital  the  several  vendors  subscribed  for  preferred  stock  to  the  amount 
of  $1,000,000. 

The  remainder  of  the  stock  authorized  to  be  issued,  namely,  $1,140,000 
preferred  and  $1,139,000  common,  is  to  be  held  for  the  purchase  of  further 
properties. 

By  the  terms  of  sale  the  several  properties  were  to  be  turned  over 
clear  of  all  liabilities.    To  enable  the  \endors  to  meet  this  requirement 

.^58 


C.  P.  A.  Examination  Questions. 

and  pay  the  amounts  subscribed  for  working  capital.  Brown  &  Jones  agreed 
to  underwrite  such  an  amount  of  stock,  issued  in  purchase,  as  might  be 
required.  At  the  last  moment,  however,  Brown  &  Jones  were  unable  to 
carry  out  their  agreement,  and  therefore,  to  save  the  organization,  the 
Blank  Company  assumed  all  of  the  underwriting  agreements  of  Brown 
&  Jones,  and  carried  them  to  completion.  The  amount  of  stock  thus 
acquired  from  Brown  &  Jones  was  $2,700,000  preferred  and  $1,600,000 
common,  besides  the  amount  issued  them  in  purchase  in  excess  of  the 
appraised  valuation.  For  the  stock  so  acquired  the  Blank  Company  issued 
its  notes  for  $850,000  on  demand,  and  $1,650,000  at  one,  two,  three,  and 
four  months. 

There  was  received  in  cash  on  account  of  subscription  to  working 
capital  $150,000,  and  the  balance  $850,000  due  on  such  subscription  was  met 
by  the  indorsement  and  surrender  of  the  demand  notes  issued  under  the 
underwriting  agreement. 

Following  its  organization  the  company  issued  bonds  to  the  amount  of 
$2,000,000.  the  proceeds  to  be  used  in  payment  of  its  underwriting  notes 
as  they  matured,  and  to  furnish  working  capital.  The  bonds  (par  value 
$1,000),  were  sold  at  $900  cash,  with  a  bonus  of  25%  preferred  stock  and 
75%  common  stock.  From  the  underwritten  stock  1,000  shares  of  pre- 
ferred have  been  sold  for  cash  at  75,  with  a  bonus  of  25%  common. 

Formulate  the  entries  necessary  to  open  the  books  of  the  company, 
and  to  state  properly  the  underwriting  features,  issuance  of  bonds,  bonus, 
etc. 


Theory  of  Accounts. 

Florida  Elxammations,  July,   1909. 

8.30  a.  m.  to  I  p.  m. 

Answer  10  questions  in  all,  viz.,  the  first  5  questions,  and  select  five  of 
the  remaining  ten  questions.  Do  not  write  out  the  question,  but  refer 
to  it  by  number  only. 

1.  Some  wholesale  houses  send  goods  to  their  branches  and  charge 
them  at  selling  price,  while  others  charge  such  goods  at  a  price  representing 
the  cost  and  an  arbitrary  amount  added  for  expenses. 

Which,  in  your  opinion,  is  the  better  plan  from  the  point  of  view  (i) 
of  the  general  office,  (2)  of  the  branch  office? 

2.  Define  and  differentiate  between  income,  revenue,  receipts. 

In  the  case  of  a  concern  lending  money  on  mortgages,  state  to  which 
class  or  classes  the  interest  on  those  mortgages  belongs,  and  give  details  of 
♦.he  manner  of  entering  it  on  the  books. 

3.  A  Receiver  is  appointed  for  a  manufacturing  concern,  and  puts  in 
your  charge  all  the  accounting  work  of  this  receivership. 

359 


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Accounting  Problems  and  Solutions. 

State  the  work  you  would  first  do  on  taking  over  the  books: 

(i)     If  the  books  were  in  balance  and  a  trial  balance  furnished 
when  the  Receiver  was  appointed. 

(2)  If  the  books  were  out  of  balance  or  defective. 

(3)  Is  it  better  for  the  Receiver  to  continue  the  old  books  or  to 

open  new  ones? 
Give  reason  for  your  answer. 

4-  A  company  is  organized  under  the  laws  of  Florida  to  purchase  a 
patent  and  to  manufacture  and  sell  the  patented  article. 

The  patent  is  paid  for  by  the  entire  issue  of  stock,  and  the  patentee  gives 
back  to  the  Company  49%  of  the  entire  stock,  to  be  used  for  developing 
purposes. 

Describe  the  formalities  which  must  be  complied  with,  and  draw  the 
opening  entries  in  the  books,  stating  what  books  are  required. 

5-  Define  "  Merchandise  Account,"  and  outline  two  methods  of  keep- 
ing it,  giving  your  opinion  as  to  which  is  the  better,  and  your  reasons 
therefor. 

6.  Give  various  methods  of  treating  premiums  and  discounts  on  bonds 
purchased. 

Give  the  advantages  and  disadvantages  of  each  method,  and  state  which 
you  consider  the  best,  with  reasons  for  your  belief. 

7.  Define  fixed  assets  and  floating  assets,  and  give  instances  of  the 
manner  in  which  each  affects  the  stability  and  the  cretdi  of  a  business. 

8.  How  do  the  accounts  of  a  commission  business  differ  from  those 
of  a  merchant? 

9.  A  manufacturing  concern,  owning  lands,  buildings,  engmes,  boilers, 
and  machinery,  has  been  in  operation  for  ten  years,  but  has  made  no  allow- 
ace  for  depreciation,  current  repairs  having  been  charged  to  "Operating 
Expenses,"  and  new  machinery  bought  having  been  charged  to  "  Plant 
Account."  You  are  given  carte  blanche  in  the  matter  of  arranging  for 
such  depreciation  at  the  time  of  the  audit  and  also  in  the  matter  of  pro- 
viding for  it  in  the  future. 

State  the  steps  you  would  take  and  the  entries  you  would  direct  for 
both  cases,  using  your  own  figures. 

10.  Sketch  the  history  of  corporations.  Define  a  modern  corporation, 
giving  examples  of  the  various  kinds. 

Describe  safeguards  against  the  abuse  of  corporate  powers  or  privi- 
leges which  are  in  force  in  countries  other  than  Florida,  and  give  reasons 
for  and  against  the  adoption  of  similar  safeguards  here. 

11.  State  the  differences  in  method  of  appointment  and  in  the  duties  of 
an  executor,  an  administrator,  a  receiver,  a  trustee. 

What  form  of  accounts  should  be  filed  in  each  case? 

12.  How  may  shares  subscribed  for  be  forfeited,  and  how  would  you 
treat  on  the  books  money  received  on  account  of  such  forfeited  shares? 

360 


C.  P,  A.  Examination  Questions. 

13.  In  arranging  accounts  for  a  partnership,  how  should  the  following 
items  be  treated:  Original  capital,  accumulated  profits  of  each  partner, 
increases  to  capital,  losses,  net  loss  on  dissolution  of  partnership? 

14.  Compare  the  advantages  and  disadvantages  of  the  voucher  check 
system  as  compared  with  payment  by  checks,  and  sketch  a  form  for  voucher 
check  record,  for  any  business  with  which  you  are  acquainted. 

15.  What  is  the  difference  between  "trade  discounts"  and  "cash 
discounts  ?  " 

Describe  in  detail  what  you  consider  the  best  method  of  treating  each. 


Auditing. 

Time  allowance  1.30  to  5.30. 
Answer  10  questions  in  all;  the  first  5  questions,  and  select  five  of  the 
remaining  ten  questions.    Do  not  write  out  the  question,  but  refer  to  it 
by  number  only. 

1.  In  the  course  of  an  audit  you  find  the  following  classes  of  security: 
(i)  real  estate,  (2)  mortgages  on  real  estate,  (3)  chattel  mortgages,  (4) 
stocks  and  bonds  held  as  collateral  security. 

For  each  of  these  classes  state:  (o)  The  method  of  examination,  (b) 
special  points  to  be  examined,  (c)  form  of  report. 

2.  In  auditing  a  large  concern,  such  as  a  mining  company  operating 
a  number  of  distinct  plants,  how  would  you  satisfy  yourself  that  the  fol- 
lowing items  were  properly  accounted  for  and  safeguarded:  (i)  Advances 
on  payrolls,  both  cash  and  merchandise,  (2)  unclaimed  wages,  (3)  pur- 
chases—which are  made  by  one  purchasing  agent  for  all  the  plants. 

(3)  On  certain  lines  of  business  (e.  g.,  real  estate  companies,  sewing 
machine  agencies,  retail  furniture  houses),  a  large  proportion  of  the  sales 
are  made  on  the  instalment  plan,  and  at  the  close  of  any  period  a  large 
number  of  such  transactions  may  be  uncompleted. 

How  should  the  profits  from  such  uncompleted  sales  be  treated  in  the 
balance  sheet? 

4.  How  would  you  audit  a  set  of  single  entry  books,  and  how  would 
you  prepare  therefrom  statements  showing  the  results  obtained  by  the 
business? 

5.  (a)  State  how  you  would  inform  yourself  as  to  the  value,  (6)  state 
how  you  would  classify,  (c)  state  how  you  would  report  on,  the  following 
assets:  (i)  Loans  and  discounts  of  a  bank,  (2)  accounts  receivable, 
where  the  number  is  considerable. 

6.  Define  secret  reserves,  and  state  the  duties  of  an  auditor  in  con- 
nection therewith. 

Give  your  opinion  as  to  the  advantages  or  dangers  arising  from  such 
reserves. 

361 


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Accounting  Problems  and  Solutions. 

7-  While  examining  a  bank,  you  find  that  many  endorsed  notes  have 
been  extended  beyond  their  original  dates. 

Is  such  a  good  practice?  Name  at  least  two  methods  for  guarding 
against  any  dangers  arising  from  it. 

8.  Describe  the  method  of  examining  a  bank,  and  point  out  those  ac- 
counts which  call  for  most  careful  scrutiny. 

9-  State  what  you  consider  the  best  way  to  handle  the  cash  account 
and  the  bank  account  in  a  set  of  books. 

How  would  you  satisfy  yourself  that  all  cash  receipts  had  been  prop- 
erly accounted  for? 

Give  example*  in  two  different  kinds  of  business. 

10.  State  fully  the  duties  and  the  responsibiUties  of  an  auditor  in  regard 
to  inventories. 

11.  In  auditing  the  accounts  of  a  business  where  accounts  receivable 
are  kept  in  a  sub-ledger,  with  a  proper  controlling  account  in  the  general 
ledger,  give  your  opinion  as  to  the  extent  to  which  the  sub-ledger  should 
be  checked,  under  various  circumstances. 

12.  Define  "good  will,^'  and  give  your  ideas  as  to  its  treatment  in 
accounts. 

Would  this  treatment  be  the  same  if  the  concern  were  thriving  as  it 
would  if  the  concern  were  losing  money? 

13.  How  would  you  show  in  your  report  of  an  audit  you  had  made,  flue-' 
tuations  in  the  value  of  the  following  securities  owned  by  the  concern: 
(a)  real  estate,  (b)  stocks  and  bonds,  (»  material  on  hand? 

In  some  cases  the  present  prices  are  higher,  and  in  some  they  are 
lower,  than  when  the  securities  were  bought.  State  your  idea  of  the 
general  principles  governing  such  variations. 

14-  In  auditing  the  books  of  a  manufacturing  business  you  find  that 
before  manufacturing  was  commenced,  considerable  sums  were  charged  to 
"plant  account"  for  salaries,  rent,  and  labor. 

Give  your  opinion  as  to  whether  or  not  such  charges  could,  under  any 
circumstances,  be  correct;  and,  if  they  could,  explain  such  circumstances. 

State  another  method  of  dealing  with  such  items. 

15.  Give  a  detailed  account  of  the  method  you  would  follow  in  audit- 
ing the  books  of  some  business  with  which  you  are  acquainted,  and  sketch 
the  heads  of  your  report  thereon. 


Commercial  Law. 

Time  allowance  8.30  a.  m.  to  i  p.  m. 
Answer  ten  questions  in  all.  viz.,  the  first  fire  questions,  and  select  five 
of  the  remaining  ten  questions.    Do  not  write  out  the  question  but  refer 
to  it  by  number  only. 

I.  Give  illustrations  of  and  describe  the  effect  of  the  following  en- 
dorsements: (a)  regular,  (b)  qualified,  (c)  restrictive,  (d)  protest  waived, 
(e)  without  recourse. 

362 


C.  p.  A.  Examination  Questions. 

2.  Define  "treasury  stock,"  and  giwt  at  least  one  illustration  of  the 
proper  use  of  the  term. 

Name  any  difference  which  may  exist  in  the  law  relating  to  treasury 
stock,  as  applied  to  banks  and  to  other  corporations. 

3.  Define  a  "contract"  State  the  essential  requirements  to  any 
contract. 

Give  some  instances  of  valid  verbal  contracts. 

4.  Name  the  essential  requirements  of  a  "negotiable  instrument," 
and  give  two  examples  illustrating  (a)  negotiable  paper,  (&)  non-negotiabie 
paper. 

« 

5-     From  what  source  should  dividends  be  paid? 

Who  is  responsible  and  to  what  extent,  if  dividends  be  improperly 
paid? 

May  a  dividend  be  legally  declared  if  former  losses  have  impaired  the 
value  of  the   stock? 

6.  What  is  the  right  of  "stoppage  in  transitu?" 

What  property  is  subject  to  such  stoppage,  and  what  elements  are  essen- 
tial to  the  release  of  the  right? 

7.  Prepare  a  voucher  check  which  is  a  negotiable  instrument. 

Give  examples  of  forms  sometimes  used  where  certain  wording  affects 
the  negotiability. 

State  to  what  extent  a  voucher  check  which  has  been  paid  proves  the 
settlement  of  a  debt,  giving  examples. 

8.  Name  those  points  in  a  partnership  agreement  which  you  regard  as 
essential,  and  show  how  you  would  provide  for  them  in  a  partnership 
agreement. 

9.  Is  there  any  advantage  gained  in  securing  a  judgment  against  an 
insolvent  debtor?     Give  examples. 

10.  If  a  buyer  refuse  to  accept  goods  he  has  ordered,  or  refuses  to  pay 
for  them,  what  recourse  has  the  seller? 

If  a  seller  refuse  to  deliver  goods  bought,  what  recourse  has  the  buyer? 

11.  Define  and  differentiate  between  insolvency  and  bankruptcy,  giving 
at  least  two  examples  illustrating  your  answer. 

12.  Define  a  corporation.  Describe  the  necessary  procedure  under  the 
laws  of  Florida  to  form  a  corporation,  and  show  the  requirements  as  to 
(a)  number  of  stockholders,  {b)  number  of  directors,  (r)  capital  stock 
paid  in,  (d)  periodical  statements. 

13.  What  are  the  requirements  under  the  Florida  law  as  to  the  execu- 
tion, acknowledgment,  and  recording  of  deeds  of  conveyance,  mortgages, 
and  chattel  mortgages? 

How  is  the  validity  of  such  papers  affected  by  the  observance  or  non- 
observance  of  these  requirements? 

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Accounting  Problems  and  Solutions. 

14.  "Define   a   "certified   check."    Does   the   certification   change   the 
liability  of  the  parties  in  any  way?     If  it  does,  explain  fully. 

15.  What  is  the  effect  upon  the  validity  of  a  note  or  check  which  is 
dated  on  any  legal  holiday? 


Practical  Accounting — Part  I. 

Time  allowance:  8.30  to  i.oo  p.  m. 
Answer  five  questions  in  all,  viz.,  the  first  three  questions,  and  select 
two  of  the  remaining  questions.    Do  not  write  out  the  question,  but  refer 
to  it  by  number  only. 

1.  The  Alpha  Company  is  organized  for  the  purpose  of  acquiring  a 
tract  of  land  and  forming  an  amusement  resort.  Its  capital  is  $50,000. 
This  stock  is  practically  all  issued  in  exchange  for  deeds  for  parts  of  said 
tract  and  to  long  term  leases  covering  the  remainder  of  tract,  these  leases 
containing,  in  all  cases,  clauses  giving  the  Beta  Company,  or  its  assigns, 
the  right  to  purchase  at  prices  named  in  the  leases  and  aggregating 
$74,620.00,  on  which  six  per  cent,  is  to  be  paid  as  rental— taxes  to  be  paid 
by  Alpha  Company. 

The  Alpha  Company  made  a  deed  of  trust  for  $150,000  on  all  its  equities 
to  secure  bonds,  and  issued  $72,000  of  such  bonds  in  April,  1906.  It  made 
a  further  issue  of  similar  bonds  to  the  amount  of  $54,000  in  April,  1907. 
With  the  proceeds  of  such  bonds  it  improved  its  property  and  erected  a 
number  of  buildings  at  a  cost  of  $110,000. 

In  April,  1907,  it  entered  into  an  agreement  with  the  Beta  Company  to 
take  charge  of  the  grounds,  arrange  entertainments,  etc.  This  necessitated 
further  improvements,  which  were  to  be  paid  for  by  the  Beta  Company; 
this  company,  however,  had  no  money;  and  so  the  Alpha  Company  ad- 
vanced $10,000  to  Beta  Company,  taking  therefor  the  note  of  the  latter 
company. 

The  Beta  Company  finally  failed  with  no  assets  (and  its  stockholders 
disappeared),  except  the  buildings  it  had  erected  on  the  Alpha  Company's 
land,  and  still  owing  Alpha  Company  for  the  said  note,  besides  owing  many 
other  creditors. 

The  Alpha  Company  now  operated  the  amusement  park  on  its  own 
account.  This  involved  further  loss;  and  its  balance  sheet  on  June  30, 
1907,  showed  as  follows: 


Assets: 

Buildings $100,000 

20,000 


Real  Estate 

Note  of  Beta  Co 


Equities  on  leases,  valued 

at 

Loss 


10,000 


100,000 
40,620 

$270,620 


Liabilities: 

Capital  Stock 

Bonds — ist  Issue — 

Due  on  Leases 

Bonds — 2nd  Issue — 

Accounts  Payable 

Mortgage  Interest,  over- 
due   


50,000 
72,000 
74,620 
54,000 
15.000 

5,000 


$270,620 


364 


C.  P.  A.  Examination  Questions. 

The  Alpha  Company  then  concluded  negotiations  with  the  the  Gamma 
Company,  an  electric  car  line  company,  whose  line  afforded  the  chief 
means  of  access  to  the  property  in  question.  This  company  had  an  author- 
ized capital  stock  of  $50,000,  all  being  issued. 

The  Alpha  Company  admitted  its  insolvency,  and  a  majority  of  its 
stockholders  agreed  to  surrender  and  cancel  their  stock,  and  to  exchange 
their  bonds  in  the  Alpha  Company  for  stock  in  the  Gamma  Company 

All  the  property  of  the  Alpha  Company  was  to  be  transferred  to  the 
Gamma  Company,  which  was  to  assume  all  its  liabilities,  and  was  to 
increase  its  authorized  capital  to  $150,000,  and  to  issue  bonds  on  all  its 
property  for  $100,000;  and,  out  of  the  proceeds  of  these  bonds  to  take  up 
the  bonds  of  the  Alpha  Company  and  pay  off  all  indebtedness  of  Alpha 
Company,  and  to  pay  off  its  own  indebtedness  and  develop  the  combined 
enterprises. 

The  Gamma  Company  owned  an  exclusive  franchise  for  its  car  line 
which,  owing  to  local  conditions,  was  safe  from  competitors  This  line' 
with  equipment,  cost  $50,000.  The  yearly  net  protfis  were  $30,000,  and 
were  likely  to  increase.  It  valued  its  franchise  at  $250,000.  It  had  the 
real  estate  owned  by  the  Alpha  Company  appraised  by  six  independent  real 
estate  experts,  the  lowest  valuation  being  $600,000,  and  the  highest  $700000 
Gamma  Company  had  outstanding  accounts  payable  amounting  to  $15*000 

State  the  steps  required  to  legalize  the  transfer  of  the  business  of  the 
Alpha  Company  to  the  Gamma  Company. 

Prepare  the  balance  sheet  of  Gamma  Company  after  the  transfer  had 
been  made,  criticising  any  items  calling  for  special  attention. 

2.  A  concern  whose  chief  office  is  in  Jacksonville  operates  a  number  of 
logging  camps,  saw  mills,  and  turpentine  stills,  with  a  commissary  in  each 
place.  All  purchases  are  made  through  one  purchasing  agent  in  Jack- 
sonville. 

Draw  up  a  system  for  the  purchasing  agent,  which  shall  provide  proof 
of  all  goods  called  for  by  commissaries  being  bought,  all  invoices  being 
charged,  all  goods  ordered  being  received  by  the  concern,  and  which  shall 
show  proper  distribution  of  all  purchases. 

3.  Draft  the  form  of  statement  you  would  prepare  to  support  a  claim 
for  loss  by  fire  which  was  suffered  by  a  retail  dry  goods  store,  six  months 
since  an  inventory  was  taken,  and  allowing  for  all  depreciation,  discounts 
and  freights.  ' 

A  portion  of  the  stock  was  not  damaged,  a  portion  was  damaged  to 
some  extent,  and  the  remainder  was  entirely  destroyed. 

4.  Define  "  prime  cost,"  "  shop  cost,"  "  cost  of  production,"  « indirect 
charges."  "  overhead  charges." 

Outline  a  simple  set  of  cost  accounts,  illustrating  the  above. 

5-  Prepare  a  set  of  accounts  suitable  for  a  garage.  The  business  in- 
cludes the  selling  agency  for  the  "  Phoenix  "  car,  and  a  repair  shop. 

The  work  of  the  repair  shop  is  of  four  kinds :  (i)  repairs  to  motors,  (2) 

365 


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Ill 


Accounting  Problems  and  Solutions. 

tuning  up,  adjusting,  and  demonstrating  new  cars,  (3)  storing  and  cleaning 
motor  cars  for  a  fixed  monthly  sum,  (4)  repairing  shop  tools. 

The  accounts  should  show  gross  profit,  cost,  and  net  profit  of  each 
branch  of  the  business. 

6.  On  the  death  of  a  turpentine  operator,  the  court  appoints  an  adminis- 
trator of  the  estate,  the  heirs  being  six  sons,  of  whom  three  are  of  age 
and  three  are  minors.  In  order  to  prevent  waste,  the  court  authorizes  the 
administrator  to  continue  the  business,  which  consists  of  naval  stores 
business  and  a  saw  mill. 

Prepare  a  set  of  accounts,  so  that  the  adminitsrator  may  know  the 
results  of  the  business,  and  so  that  he  may  easily  prepare  the  accounts  in 
proper  form  for  the  court. 

7.  What  is  meant  by  a  "  ledger  analysis  ?  " 
Give  an  illustration  of  how  you  would  prepare  it. 


Practical  Accounting — Part  II. 

Time  allowance  1.30  to  500  p.  m. 

Answer  five  questions  in  all,  vis.,  the  first  two  questions,  and  select 
three  of  the  remaining  questions.  Do  not  write  out  the  question,  but  refer 
to  it  by  number  only. 

I.  You  have  audited  a  set  of  books  of  a  wholesale  grocery  corpora- 
tion for  the  year  ending  June  30,  1909,  and  find  the  trial  balance  to  be  as 
follows.     (See  below). 

Prepare  such  statements  as  you  consider  necessary  to  close  the  books, 
to  show  the  results  of  the  business,  and  to  show  the  present  value  of  the 
business. 

Dr.  Cr. 

Accounts  Payable $1 7,100 .  00 

Accounts  Receivable $23,500 . 00 

Advertising 4,300 .  00 

Bills  payable 15,000. 00 

Bills  Receivable 8,000 .  00 

Buildings  (Cost  5  yrs.  ago,  no  depreciation  al- 
lowed heretofore) 18,500 .00 

Cash  in  Bank 8,200.00 

Capital  Stock 30,00 .00 

Drayage 1,100.00 

Discounts 550 .  00 

Expense  Account 2,000 . 00 

Freight  Account  (All  in-freight) 2,800 .00 

Insurance 2,600 .  00 

Interest 800 .  00 

Mortgage  Interest 800 .  00 

Mortgages 10,000 .  00 


C.  P.  A.  Examination  Questions. 

Mules  and  Vehicles .   . 

Office  Furniture  and  Fixtures  '.'.'.V.V. .  Inn  'nn 

Petty  Cash 2,300.00 

Purchases— Dr.  $1 75,000 .  00 . . . .".".'. ......  50  •  00 

^''"    3.000-00. ..!!!!;!:;:;;:;:  172,000.00 

Real  Estate 

Rent  20,000 .  00 

Repairs .' ^'^^^  •  oo 

3,500.00 

Sales — Cr.   $210,000.00 

Dr.        5,000.00 «. 

$205,000.00 

Stationery  and  Printing 

Profit  and  Loss  Account 500.00 

Salaries 5,700.00 

Traveling  Expenses'." .' .' .' 5.4oo.oo 

Wages 1,800.00 

Taxes,  1908.*..'.; ." 1,600.00 

500.00 

^283,350.00  $283,350.00 

June  30,  1909. 

Inventory....        %2^ooo.OO 

Ihe  accounts  receivable  are  as  follows: 

Over  I  year  old $1,200.00 

™;i^^ ;• 2,500.00 

One-half  year  old 3,000.00 

^"^^^"t 16,000.00 

c  $23,500.00 

Suggest  proper  treatment. 

Real  estate,  and  furniture  and  fixtures: 

These  accounts  represent  actual  cost  of  investment  from  commence- 

ZTrjLTl!'   six  years   ago,   to   date,   repairs   having  always   been 
charged  to  Profit  and  Loss  account. 
Buildings  are  of  brick. 

Insurance  expires,  one-half  on  September  30,  and  one-half  on  Decem- 
ber 31. 

2.  Draw  up  a  set  of  accounts  for  a  lumber  company  which  operates 
live  distmct  saw  mills,  two  logging  camps,  and  commissaries  at  each  of  the 
seven  points  of  operation. 

It  purchases  many  goods  on  invoices  subject  to  discount  if  paid  within 
ten  days  from  date  of  invoice.  How  does  this  affect  the  use  of  a  voucher 
system  in  such  a  business? 

3.  Describe  in  detail  a  method  for  keeping  a  perpetual  inventory  for 
a  wholesale  business  (grocery),  and  point  out  any  advantages  arisinir 
therefrom.  * 

4.  An  income  earner  having  been  killed  by  a  railroad  train,  suit  is 
brought  agamst  the  railway  company,  and  counsel  for  the  heirs  engages 

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Accounting  Problems  and  Solutions. 

you  to  calculate  the  present  value  of  his  life,  giving  you  his  age  and  his 

yearly  earnings  ? 

How  would  you  prepare  your  testimony?  Are  life  insurance  company 
tables  showing  their  prices  for  annuities  good  evidence  in  such  cases? 
Give  reasons  for  your  answer. 

5.  Describe  a  system  for  controlling  payrolls  for  naval  stores,  saw  mill 
or  mining  companies,  where  the  following  details  occur:  (i)  Commis- 
saries are  maintained  and  goods  are  advanced  to  employees  between  pay 
days  (2)  cash  is  also  advanced  to  employees  between  pay  days,  (3)  m 
order  to  secure  sufficient  labor,  new  employees  are  allowed  advances  before 
they  commence  work. 

6  Describe  the  method  of  closing  the  books  of  a  concern,  stating  how 
you  provide  for  depreciation,  bad  debts,  surplus,  and  dividend  accounts, 
and  show  relationship  between  trial  balance,  trading  statement,  profit  and 
loss  account,  assets  and  liabilities. 


368 


C.  P.  A.  Examination  Questions. 


UNIVERSITY  OF  ILLINOIS 

Examination  for  Certificate  as  Certified  Public  Accountant. 
Chicago,  111.,  May  3.  4.  5,  1909. 

Practical  Accounting — Part  I. 

9.30  a.  m.  to  12.30  p.  m. 

75  credits  necessary  to  pass,  out  of  a  possible  100  credits 
Each  complete  answer  will  receive  162-3  credits.  Do  not  repeat  ques- 
tions on  examination  papers,  but  write  answers  only,  designating  the 
questions  by  number.  The  intelligence  indicated  by  answers  will  be  con- 
sidered in  marking  che  applicants,  as  well  as  the  technical  accuracy  of 
such  answers. 

I.  The  fiscal  year  of  a  Manufacturing  Company  ends  June  30,  1908, 
and  the  bookkeeper  presents  a  statement  to  the  Directors  made  up  in  the 
following  form: 

Gross  Sales $285,000.00 

Increase  of  Inventory 15,000.00 

$300,000 .00 

Cost  of  sales: 

Operating  expenses,  material  &  supplies $257,000.00 

Plant  expense 12,000 .00 

Freight  on  returned  goods 600 .00 

Sundry  purchases  finished  goods 10,400 .00 

■ $280,000 .00 


Manufacturing  Profit $    20,000  .00 

Other  Income: 

Miscellaneous  earnings $     1,500 .00 

Profit  on  contracts 6,500  .  00 

Discoimt  on  purchases 500  00 

$     8,500.00 


$  28,500.00 


Less: 

Discoimt  on  sales 

Rebates  and  allowances. 


2,875.00 
1,125.00 


$     4,000.00 


Net  Plant  Profit. 


$  24,500.00 


Less: 


General  expenses $     5.500  00 

Interest 1,500.00 


$7,000.00 


Net  Profit $  17,500.00 

You  are  required  to  make  up  a  Profit  and  Loss  statement  in  regular 
form,  showing  Purchases,  etc.,  and  using  such  of  the  above  figures  as  may 
be  necessary  together  with  these  following: — Inventory  Jime  30,  1907. 

369 


I 


H'  )1 


11  fi 


Accounting  Problems  and  Solutions. 

Material  $115,000,  Supplies  §35,000,  Finished  Goods  $45,000.  Inventory 
Jtine  30,  1908.  Material  $140,000,  Supplies  $10,000,  Finished  Goods 
$60,000.  Material  used  in  factory  during  the  year,  $75,000.  Wages, 
$122,500.  Fuel.  $2,500.  Repairs  and  Renewals,  $2,000.  Other  operating 
expenses,  $55,000,  which  includes  $25,000  supplies  used. 

2.  By  the  partnership  deed  of  a  manufacturing  firm  consisting  of  four 
members,  A.  B.  C.  and  D.  it  was  provided  that  in  the  event  of  the  death 
of  any  partner  before  the  expiration  of  the  partnership  by  effluxion  of  time 
on  December  31st,  191 1,  there  should  be  paid  to  the  legal  representatives 
of  the  deceased  the  amoimt  appearing  to  his  credit  on  December  31st, 
next  preceding  the  death,  together  with  interest  thereon  at  5  per  cent, 
per  annum  to  December  31st  following  the  decease  and  a  share  of  the  pro- 
fits of  the  year  of  his  decease  corresponding  to  the  number  of  days  that 
he  lived  during  it,  calculated  after  the  rate  of  the  average  of  his  share  for 
the  last  three  completed  years,  together  with  interest  on  such  share  from 
the  date  of  death  to  the  end  of  the  year. 

The  four  partners  shared  profits  equally,  and  each  took  interest  on  his 
capital  at  5  per  cent,  per  annum,  but  no  interest  was  charged  on  the  draw- 
ings, for  each  drew  at  the  end  of  every  month  an  equal  sum  in  anticipation 
of  profits. 

The  surviving  partners  were  to  share  the  profits  equally.  "C"  died  on 
June  30th,  1905.  The  profits  of  the  three  immediately  preceding  years 
had  been  respectively  $70,000.00,  $78,000.00  and  $63,500.00.  The 
proportion  payable  in  respect  of  a  deceased  partner's  interest  and  profits 
it  was  stipulated  by  the  deed  of  partnership  should  be  treated  as  a  trade 
expense  of  the  year  in  which  he  died. 

With  the  aid  of  the  following  Trial  Balance,  of  December  31st,  1905, 
taken  out  before  interest,  depreciation,  and  an  amo\mt  in  lieu  of  factory 
rent  have  been  charged,  prepare  Manufacturing  and  Profit  and  Loss 
Accounts  for  1905,  showing  the  various  items  in  their  proper  divisions, 
and  allowing  $2,500.00  for  depreciation  of  Plant  and  Machinery,  $250.00 
for  depreciation  of  Office  Furniture  and  Fixtures,  and  5  per  cent,  on  the 
amoimt  of  the  Real  Estate  (as  appearing  in  the  Trial  Balance)  for  Factory 
Rent.  Also  construct  a  Balance  Sheet,  showing  what  was  due  to  the  de- 
ceased's estate  and  what  capital  stood  to  the  credit  of  each  of  the  surviv- 
ing partners. 

The  inventory  at  December  31st,  1905,  was  $125,000.00.  Bills  Receiv- 
able to  the  amotmt  of  $1,000.00  falling  due  after  December  31st,  1905,  had 
been  disconuted. 

Trial  Balance,  December  31st,  1905. 

A,  Capital  Account $120,000 .00 

B,  Capital  Account 1 10,000 .00 

C,  Capital  Account 100,000 .00 

D,  Capital  Accoimt 90,000 .  00 

A,  Drawing  Account $  1 2,000 . 00 

B,  Drawing  Account 12,000 .00 

C,  Drawing  Account 5,000 .00 

D,  Drawing  Account 12,000.00 

Inventory,  December  31,  1904 100,000.00 

370 


C.  p.  A.  Examination  Questions, 

Purchases    during    the    year    after    crediting 

Bought  Returns 1,775,000 .00 

Factory  Wages  and  Salaries 250,000 .  00 

Balance  of  Discounts  Received,  and  Allowed. . .  20,000 .  00 
Sales  during  the  year,  after  debiting  sold  Re- 
turns   2,1 10,000.00 

Cash  in  Hand  and  at  Bank 29,500 .00 

Bad  Debts 16,000 .  00 

Bills  Receivable 15,000 .00 

Office  Salaries 9,000 .00 

General  Office  Expenses 2,500 . 00 

Accounts  Receivable 414,000 .00 

Traveling  Expenses 10,000 .  00 

Taxes,  Factory 1,000 .00 

Rent  and  Taxes,  Office 2,000 .00 

Real  Estate 60,000 .  00 

Plant  and  Machinery 1 5,000 . 00 

Office  Furniture  and  Fixtures 2,500.00 

Bills  Payable 50,000 .  00 

Accounts  Payable 1 50,000  .  00 

Interest  and  Bank  Discount,  paid 7,500 .00 

$2,750,000.00  $2,750,000.00 

3.  A  new  corporation,  "D",  is  formed  to  purchase  and  amalgamate 
the  businesses  of  three  corporations,  "A,"  "B,"  and  "C,"  carrying  on  the 
same  class  of  business,  at  December  31st,  1908. 

There  are  considerable  differences  between  the  capitals,  the  gross  sales, 
the  expenses  and  the  net  profits  of  the  three  corporations.  The  amoimt 
to  be  allotted  to  each  in  shares  of  the  new  corporation  for  its  capital  and 
good  will  is  agreed  to  be  referred  to  you. 

Using  your  own  figiu-es,  construct  and  give  a  profit  and  loss  accoiint  for 
five  years  ended  December  31st,  1908,  and  balance  sheet,  showing  liabili- 
ties other  than  capital,  at  December  31st,  1908,  for  Corporations  "A," 
"B,"  and  "C,"  illustrating  the  foregoing  particulars,  and  assume  that 
Corporation  "A"  shows  a  larger  profit  on  a  smaller  capital  than  either  of 
the  others. 

Give  the  balance  sheet  of  the  new  Corporation  "D"  as  it  will  appear  as 
the  result  of  your  Report,  and  state  your  reasons  for  the  allotment  you 
consider  equitable. 


Practical  Accounting — Part  II. 

1.30  to  4.30  p.  m. 

4.  Two  professional  firms,  consisting  of  two  partners  each,  argee  to 
amalgamate.  Jones  and  Robinson  have  Accounts  Receivable,  $12,500.00 
and  other  assets  taken  as  net,  $1,250.00.  Sikes  and  Wilson  have  Accounts 
Receivable,  $11,000.00,  and  other  assets  net  $1,000.00,  each  firm  bringing 
$2,500.00  in  Cash  and  discharging  their  own  liabilities,  with  an  arrange- 
ment that  the  partners  of  each  firm  shall  have  a  preferential  allowance  of 
15  per  cent,  on  professional  fees  arising  from  the  connections  of  each  firm. 

At  the  end  of  twelve  months  the  earnings  were  $49,500.00,  of  which 
$19,000.00  came  from  Jones  and  Robinson's  introduction,   $23,000.00 

371 


Accounting  Problems  and  Solutions. 


C.  P.  A.  Examination  Questions. 


I 


ill 


from  Sikes  and  Wilson's,  and  the  rest  from  neutral  ground.  The  Ac- 
counts Receivable  of  Jones  and  Robinson  were  realized  at  an  average  loss 
of  6  per  cent.,  those  of  Sikes  and  Wilson  at  5  per  cent.  The  expenses  were 
$16,725.00. 

As  at  the  end  of  the  year,  make  out  the  Realization  Account  of  each 
firm,  the  Profit  and  Loss  Account  of  the  amalgamated  firm,  and  the  Capi- 
tal Accounts  of  each  partner,  allowing  interest  on  the  net  assets  and  cash 
brought  in  at  5  per  cent,  per  annum,  but  none  on  the  Accounts  Receivable. 
The  drawings  have  been:  Jones,  $5,000.00;  Robinson,  $3,250.00;  Sikes, 
$5,500.00;  Wilson,  $3,500.00,  without  interest. 

Profits  are  divided  as  follows:  Jones  and  Sikes,  three-tenths  each; 
Robinson  and  Wilson,  two-tenths  each.  The  same  proportions  govern  the 
divisions  of  Assets  brought  in  and  the  Preferential  Allowances. 

5.  Two  merchants,  C.  F.  Munton  and  W.  A.  Spencer,  agree  to  share 
equally  in  a  joint  adventure  in  trade  to  the  West  Indies. 

On  March  ist,  1907,  they  charter  a  small  vessel  and  purchase  and  ship 
materials  which  cost  them  $197.00,  for  which  Munton  gives  his  check. 

This  cargo  they  consign  to  John  Smith,  their  agent  at  Havana,  which  he 
disposes  of,  and  in  return  ships  on  board  the  same  vessel  4,000  cases  of 
Commodity  A  and  1 00  cases  of  Commodity  B ;  and  he  draws  on  Munton  at 
sight  for  $125.00  this  being  the  amount  of  the  agent's  charges  and  dis- 
bursements over  and  above  the  net  proceeds  of  the  cargo  consigned  to  him. 
Mtmton  accepts  and  pays  the  bill.  On  April  ist  the  vessel  arrives,  where- 
upon Munton  pays  sundry  charges  of  $33 7. 50.  Spencer  pays  the  freight 
amoimting  to  $493.00.  On  April  4th  Munton  sells  1,000  cases  of  Com- 
modity A  to  Henry  Chamberlain  for  $239.58,  and  collects  $150.00,  and  on 
April  loth  Spencer  collects  the  rest. 

About  this  time,  Mr.  Spencer  happens  to  have  occasion  for  1,400  cases 
of  Commodity  A,  which  he  takes  on  April  14th,  and  with  Mimton's  consent 
values  at  $291.66.  He  also  takes  10  cases  of  Commodity  B,  valued  at 
$47.50.  Mimton  sells  the  other  1,600  cases  of  Commodity  A  on  April  20th 
to  John  Walters  for  $383.33,  and  a  month  after  accepts  $382.50  in  full 
payment. 

Mr.  Mimton  next  sells  on  April  25th  the  other  90  cases  of  Commodity 
B  in  barter  for  30  cases  of  Commodity  C,  which  he  and  Spencer  divide 
eqtially  between  them. 

The  goods  being  thus  disposed  of,  Munton  presents  his  bill  of  charges, 
which  comes  to  $22.66,  and  desires  to  have  accounts  stated  between  Mr. 
Spencer  and  him. 

You  are  required  to  give  the  Ledger  Accotmts  of  the  joint  adventure 
recording  the  foregoing  transactions  as  follows: 

Joint  Adventure  Account, 

C.  F.  Munton, 

W.  A.  Spencer, 

Henry  Chamberlain, 

John  Walters, 
and  also  W.  A.  Spencers'  account  in  C.  F.  Munton's  ledger    showing  his 
joint  adventure  with  W.  A.  Spencer. 

372 


6.  On  December  i,  1907,  the  following  particulars  are  furnished  of 
the  position  of  John  Mapleton,  insolvent:  Factory  equipment  cost  $15,- 
000.00,  estimated  to  realize  $10,000.00.  Stock  of  finished  goods,  $10,000.- 
00,  estimated  worth  $7,500.00.  Material  and  supplies  $2,500.00,  estimated 
worth  $1,000.00.  Furniture  and  Fixtures,  $900.00,  estimated  worth 
$200.00.  Investments  valued  at  $25,275.00,  of  which  $15,000.00  is  held 
by  Bankers  as  security  for  a  loan  of  $12,000.00.  Accounts  receivable, 
$6,250.00,  of  which  $2,500.00  are  good;  $1,250.00  bad;  and  $2,500.00  es- 
timated to  realize  $1,500.  Cash,  $575.00,  of  which  $25.00  represents 
petty  expense  items  not  charged  up,  and  $50,00  an  I.  O.  U.  of  a  former 
employe  which  is  worthless.  Accotmts  Payable,  $25,500.00.  Bills  Pay- 
able, $25,000.00,  of  which  $12,000.00  is  due  Bankers.     Wages  due,  $500.- 

00.  Rent  due  and  past  due,  $1,000.00.  Capital  on  January  i,  1907,  as 
shown  by  books,  $15,000.00.  Loss  by  sale  of  investment  May  i,  1907, 
$5,000.00.  Loss  in  trading  account  January  i,  1907,  to  December  i, 
1907.  $3i5oooo-  Drawings  charged  personal  account  of  John  Maple- 
ton,  $1,000.00. 

Make  up  a  statement  of  affairs  and  a  Deficiency  account  as  on  December 

1,  1907. 


Auditing. 

1.30  to  4.30  p.  m. 

75  credits  necessary  to  pass,  out  of  a  possible  100  creidts. 

Each  complete  answer  will  receive  10  credits.  Do  not  repeat  questions 
on  examination  papers,  but  write  answers  only,  designating  the  questions 
by  number.  The  intelligence  indicated  by  answers  will  be  considered  in 
marking  the  applicants,  as  well  as  the  technical  accuracy  of  such  answers. 

1.  To  what  extent  do  you  consider  it  an  Auditor's  duty  to  examine 
into  and  report  upon  the  stock  inventories  and  the  methods  by  which 
the  stock  has  been  taken  and  valued? 

2.  A  company  shows  among  its  assets  $2,675.00  as  im-expired  insur- 
ance on  January  i,  1907.  On  February  i,  1907,  the  plant  is  destroyed 
by  fire  and  a  total  loss  of  $57,875.00  occurs,  which  the  Insurance  Com- 
pany pays.  How  would  you  treat  the  $2,675.00  im-expired  insurance 
item? 

3.  In  auditing  the  accounts  of  a  Manufacturing  Company  would  you 
consider  it  proper  to  allow  the  Profit  and  Loss  account  to  be  credited  with 
profit  on  uncompleted  work? 

4-  State  your  tmderstanding  of  a  "continuous  audit."  What  are  its 
advantages  over  a  yearly  or  half  yearly  audit?  Can  you  point  out  any 
special  dangers  to  which  it  is  exposed? 

5.  You  are  employed  to  audit  the  accoimts  of  the  Utility  Mills  and 
find  that  the  machinery  after  having  been  regularly  depreciated  for  a 
number  of  years  has  been  valued  by  an  independent  appraiser  at  a  sum 

373 


iiH 


Accounting  Problems  and  Solutions. 

considerably  in  excess  of  the  book  value,  and  the  Company  has  appreciated 
the  machinery  item  in  the  balance  sheet  by  such  increased  value.  How 
woidd  you  suggest  that  the  corresponding  credit  should  be  dealt  with? 
Would  such  an  appreciation  be  available  for  distribution  in  the  shape  of  a 
dividend? 

6.  Give  six  typical  examples  of  Fraud,  of  which  only  four  involve  the 
abstraction  of  actual  money,  and  explain  shortly  what  means  you  would 
suggest  to  reduce  the  risk  of  loss  under  each  of  these  headings  to  a  mini- 
mum. 

7.  Explain  shortly  the  effect  of  a  fall  of  the  Tael  on  each  of  the  follow- 
ing: 

A  Chicago  concern  carrying  on  a  general  trading  business  in  China; 
A  Chicago  corporation  owning  a  railroad  in  China ; 
A  Chicago-Chinese  Bank. 

Confine  your  answer  to  the  effect  that  the  variation  in  exchange  should 
have  on  the  published  accounts. 

8.  A  corporation  purchased  a  business  as  a  going  concern  on  January 
ist.viQoS,  with  a  right  to  the  profits  from  October  ist,  1907.     Its  capital 

i$: 

5  per  cent.     First  Preferred  Stock $250,000 .00 

6  per  cent.  Second  Preferred  Stock $2 50,000. 00 

Common  Stock $124,000 .00 

The  year's  profits  to  September  30th,  1908,  are  found  to  have  been 
$38,320.00.  What  appropriation  of  such  profits  would  you  consider  to  be 
correct  ? 

9.  A  Cash  Book  exists  with  three  columns  on  each  side,  viz..  Debit 
Side,  Discounts,  Cash  Receipts,  Bank;  Credit  Side,  Discoimts,  Cash  Pay- 
ments, Bank. 

In  making  an  audit,  you  find  that  the  Cashier  closed  his  Cash  Book  at 
the  end  of  a  month,  bringing  down  cash  balance  of  $1 77.91 ;  you  count  his 
cash  and  find  that  he  has  only  $1 19.12.  On  going  carefully  through  the 
month's  transactions,  you  find  that  $45-37  paid  in  cash  had  been  en- 
tered in  the  Bank  column ;  the  total  of  a  previous  page  of  Cash  Receipts, 
$2,516.25,  was  brought  forward  at  $2,525.75;  the  discount,  $2.50,  on  an 
accoimt  paid  had  been  entered  in  the  Cash  column  as  a  payment  instead 
of  in  the  Discount  column;  $10.00  received  from  a  partner  for  payment 
of  a  private  accoimt  had  been  included  in  the  Cash  in  Hand,  but  not 
entered  in  the  Cash  Book. 

Rule  a  form  of  Cash  Book  as  above,  enter  the  balance  brought  down, 
and  make  entries  to  correct  the  errors  above  described.  Show  the  de- 
ficiency still  existing,  and  state  how  it  should  be  dealt  with. 

10.  Reply  to  the  following  letter. 
Dear  Sir: 

We  wish  you  to  audit  our  accounts  for  the  past  ten  years  and  to  report 
thereon.     In  your  report  please  state  what  Dividend  may  in  your  opinion 

374 


C.  P.  A.  Examination  Questions, 

be" fairly  expected  in  the  future  if  the  business  is  taken  over  by  a  corpora- 
tion with  a  paid  up  capital  of  $500,000.00.  The  capital  of  the  partners 
during  the  period  named  has  been  $375,000.00,  and  the  profits  divided 
have  averaged  over  15  per  cent.,  as  shown  by  the  accounts  you  are  asked 
to  verify. 

Yours  very  truly, 

Smith  &  Brown, 


Questions  on  Commercial  Law. 

9.30  a.  m.  to  12.30  p.  m. 

75  credits  necessary  to  pass,  out  of  a  possible  100  credits. 

Each  complete  answer  will  receive  10  credits.  Do  not  repeat  questions 
on  examination  papers,  but  write  answers  only,  designating  the  questions 
by  number.  The  intelligence  indicated  by  answers  will  be  considered  in 
marking  the  applicants,  as  well  as  the  technical  accuracy  of  such  answers. 

1.  How  may  a  partnership  at  will  be  dissolved  when  the  partnership 
agreement  does  not  refer  to  this  subject?  Under  what  circumstances 
generally  may  a  partnership  for  a  definite  term  be  dissolved  before  the 
term  has  expired,  and  how  can  such  dissolution  be  compelled  ? 

2.  Is  a  contract  for  the  sale  of  corporate  stock,  bonds,  or  other  personal 
property  valid  under  the  law  of  Illinois  if  oral  and  not  in  writing,  and  what 
generally  is  the  law  elsewhere  on  this  point,  if  you  know? 

3.  V.  C.  Turner  agreed  upon  sufficient  consideration  that  on  or  before 
a  certain  day  George  Schneider  might,  if  he  so  elected,  buy  of  him  500 
shares  of  stock  in  the  North  Division  Street  Ry.  Co.,  at  $500  per  share. 
Before  the  stipulated  date  Schneider  tendered  the  agreed  price  and  de- 
manded the  stock.  The  contract  was  made  and  was  to  be  performed  in 
Chicago.     Was  it  valid?     Give  reasons. 

4.  The  President  of  an  Illinois  corporation  went  to  a  Bank  in  Chicago 
and  requested  a  loan  on  his  note  for  $10,000  for  his  personal  benefit.  The 
Bank  Priesdent  said  he  would  make  the  loan  if  the  directors  of  the  bor- 
rower's Company  would  authorize  the  borrower  to  endorse  it  in  the  name 
of  the  Company.  They  did  so,  the  endorsement  was  made,  the  Bank  dis- 
coimted  the  note  and  paid  the  proceeds  to  the  maker.  He  failed  to  pay 
it,  proper  demand  was  made  and  notice  of  non-payment  given.  Is  the 
endorsement  binding  on  the  Company?     Give  reasons  for  your  answer. 

5.  Under  what  laws  are  National  Banks  organized  and  controlled, 
that  is,  tmder  the  laws  of  what  sovereignty  or  government? 

6.  Can  a  National  Bank  loan  money  on  real  estate  security?  If  it 
does,  can  a  borrower  who  has  given  a  real  estate  mortgage  to  secure  such  a 
loan,  defeat  the  lien  of  the  Bank  on  the  real  estate  covered  by  the  mortgage  ? 

7.  What  are  days  of  grace  on  commercial  paper  at  common  law?  Are 
they  allowed  by  the  law  of  Illinois? 

375 


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'I 


ill 


Accounting  Problems  and  Solutions. 

8.  If  a  man  is  interested  in  the  profits  of  a  business,  is  he  necessarily 
a  partner  therein?  If  you  answer  this  question  in  the  negative,  give  an 
illustration  of  when  a  party  so  interested  would  not  be  a  partner. 

9.  Suppose  a  stock  broker  buys  or  sells  stocks  for  a  customer  in  Chicago 
when  he  has  no  broker's  license,  as  required  by  the  ordinances  of  that  City. 
Can  he  recover  his  commissions  on  such  transaction? 

10.  Can  a  corporation  be  organized  in  Illinois  under  the  laws  of  that 
State  to  deal  in  real  estate? 


Theory  of  Accounts. 

9.30  a.  m.  to  12.30  p.  m. 

75  credits  necessary  to  pass,  out  of  a  possible  100  credits. 

Each  complete  answer  will  receive  10  credits.  Do  not  repeat  questions 
on  examination  papers,  but  write  answers  only,  designating  the  questions 
by  number.  The  intelligence  indicated  by  answers  will  be  considered  in 
marking  the  applicants,  as  well  as  the  technical  accuracy  of  such  answers. 

1.  Give  your  understanding  of  the  "double  accoimt"  system  and  state 
the  kind  of  business  undertakings  to  which  it  is  usually  applicable. 

2 .  a.  What  is  the  purpose  of  a  Profit  and  Loss  accoimt  and  how  is  it 
made  up? 

b.  What  does  the  balance  of  a  Profit  and  Loss  accoimt  represent  ? 

c.  How  would  you  suggest  that  the  final  balance  in  such  an  account 
should  be  treated.? 

3.  a.  Give  your  understanding  of  the  term  "Depreciation"  and  state 
wherein  it  is  or  is  not  equivalent  to  "Wear  and  Tear"  ? 

b.  Explain  different  methods  by  which  depreciation  may  be  en- 
tered on  the  books  of  accoimt  and  state  which  method  you  prefer,  and  give 
reasons  for  your  answer. 

4.  After  having  conducted  his  business  as  a  wholesale  coal  dealer  for 
one  year,  and  keeping  only  single  entry  accounts,  the  proprietor  employs 
you  to  place  his  books  in  condition  to  be  kept  on  a  system  of  double  entry. 
You  find  only  a  Cash  Book,  Day  Book  and  Ledger.  Detail  course  you 
would  adopt  to  produce  a  Profit  and  Loss  Account  and  a  Balance  Sheet 
and  for  providing  double  entry  system  required. 

5.  It  has  been  stated  "that  Revenue  expenditures  do  not  create 
assets."  What  is  your  opinion?  Also  state  the  general  distinction  be- 
tween Revenue  expenditures  and  Capital  expenditures. 

6.  State  three  purposes  for  which  a  Sinking  Fund  may  exist,  and  give 
an  example  of  each. 

7.  A  manufacturing  concern  with  ten  branches  in  different  cities 
wishes  to  keep  all  the  accounts  at  a  central  office  and  to  know  the  separ- 
ate results  of  the  trading  of  each  branch.     Give  a  short  description  of  how 

376 


C.  P.  A.  Examination  Questions. 

the  Sales,  Purchases  and  Cash  transactions  might  be  dealt  with,  the  goods 
being  delivered  direct  to  customers  from  each  branch,  materials  purchased 
at  each  and  occasional  remittances  from  customers  there  received. 

8.  Give  four  methods  of  apportioning  over-head  expenses  in  Factory 
Costs,  and  state  which,  in  your  opmion  is  the  best,  and  why? 

9.  A  manufacturer  finds  that  during  three  months  his  goods  have  cost 
per  cent,  on  the  sale  price: 

Raw  Material 

Wages 

Rent,  etc ^° 

Fuel V.V.V.'.V.V.'.V.'.V.V.V. ""^ 

General  Expenses J* 

80 

What  should  he  add  to  his  selling  price  to  obtain  the  same  profit  if  the 
following  advances  take  place? 

i?^}'  ••• ; 50  per  cent,  advance 

Wales      w5  P^^  ^^*-  advance 

'^^^^ 23^    per  cent,  advance 

10.  Give  (a)  four  examples  of  assets  that  are  Fixed  Assets  in  conecn- 
tion  with  some  particular  class  of  business,  but  generally  Floating  Assets ; 

(b)     Four  examples  of  assets  that  are  Floating  Assets  in  connection 
with  some  particular  class  of  business,  but  generally  Fixed  Assets. 


General  Accounting. 

Pennsylvania  Examination,  November,  1 909. 

9  a.  m.  to  I  p.  m. 

I.  The  following  is  abstracted  from  an  agreement  of  merger  and 
consolidation  made  December  31,  1908,  between  the  Pennsylvania  Tool 
Co.,  party  of  the  first  part,  and  the  Keystone  Tool  Co.,  party  of  the  second 
part.  Said  parties  of  both  parts,  being  corporations  duly  organized  and 
existing  under  the  laws  of  the  State  of  Pennsylvania,  by  this  agreement 
merge  and  consolidate  into  a  single  corporation. 

The  name  of  the  corporation  hereby  formed  by  said  consolidation  shall 
be  the  Pennsylvania  Tool  Co. 

The  amount  of  capital  stock  of  the  new  corporation  is  $100,000,  all  of 
which  shall  be  common  stock,  divided  into  1000  shares  of  a  par  value 
of  $100.     The  manner  of  distributing  capital  stock  shall  be  as  follows: 

The  capital  stock  of  the  Pennsylvania  Tool  Co.,  party  of  the  first  part, 
shall  be  exchangeable  for  capital  stock  of  the  new  corporation  share  for 
share,  and  the  balance  of  the  capital  stock  of  the  new  corporation  hereby 
formed  shall  be  distributed  to  the  stockholders  of  the  Keystone  Tool 
Co.,  in  proportion  to  their  present  holdings. 

The  Pennsylvania  Tool  Co.,  party  of  the  first  part,  was  incorporated 
shortly  before  the  date  of  the  merger,  and  had  transacted  no  business 

377 


..  1 


" 


I' 


I  p. 


i 


f 


lli!^ 


; 


Accounting  Problems  and  Solutions. 

other  than  the  issuance  of  ten  shares  capital  stock  $ioo  each,  for  which 
payment  of  $1000  had  been  received,  and  which  was  on  hand  in  the  treas- 
ury of  the  company  on  the  date  of  the  merger,  and  directly  after  the  merger 
transferred  to  the  bank  deposit  accoimt  of  the  consolidated  company 
and  credited  to  an  account  called  "Suspense." 

The  Keystone  Tool  Co.,  had  for  a  number  of  years  been  actively 
engaged  in  business  Its  fiscal  year  ended  September  30,  1908,  at  which 
time  an  inventory  was  taken,  and  its  accoimts  had  been  properly  closed. 
At  the  date  of  the  merger  the  following  trial  balance  was  drawn  from  the 
books : 

DEBITS  CREDITS 

Cash $20,000 .00 

Accoimts  receivable 15,000 .00 

Merchandise — 

Inventory  September  30,  1908 130,000 .00 

Merchandise  purchases 250,000  .00 

Expenses 25,000 .00 

Accounts  payable *   10,000 . 00 

Sales 300,000 .00 

Capital  Stock 30,000 .00 

Undivided  Profits — 

Balance  September  30,  1908 100,000 .00 

Totals $440,000.00     $440,000.00 


The  accotmt  books  of  this  concern  were  not  closed  at  the  date  of  the 
merger,  and  no  inventory  was  taken,  although  the  exchange  of  capital 
stock  was  effected  and  also  all  business  after  December  31,  1908,  was 
transacted  under  the  name  of  the  Pennsylvania  Tool  Co.,  and  it  was 
not  until  March  31,  1909,  that  an  accountant  was  asked  to  state  the 
accounts  of  the  new  company  from  the  date  of  the  consolidation. 

At  March  31,  1909,  before  the  accountant  had  commenced  his  work, 
an  inventory  was  taken  which  showed  the  value  of  merchandise  on  hand 
as  at  that  date  to  be  $216,250,  and  the  following  trial  balance  was  ab- 
stracted from  the  books: 

TRIAL   BALANCE.    MARCH    31,  1909 

DEBITS  CREDITS 

Cash $26,000.00 

Accounts  receivable 10,000 .00 

Merchandise  inventory,  September  30,  1908... .    130,000.00 

Merchandise  purchased 600,000 .00 

Expenses 60,000  .00 

Accounts  payable »  10,000 .00 

Sales 685,000 .00 

Suspense 1,000 .00 

Capital  stock 30,000 .00 

Undivided  profits 100,000.00 

Totals $826,000.00     $826,000.00 


Prepare  a  balance  sheet  of  the  consolidated  company  as  at  March  31, 
1909,  and  a  profit  and  loss  account  arranged  to  show  the  profits  of  the 

378 


C.  P.  A.  Examination  Questions. 

consolidated  company  for  the  three  months  ended  March  31st;  and  of  the 
Keystone  Tool  Co.  for  the  three  months  ended  December  31st;  also 
statement  showing  the  disposition  of  profits  taken  over  by  the  new 
company. 

State  what  basis  you  make  use  of  in  determining  the  approximate 
value  of  merchandise  on  hand  at  December  31st. 

2  p.  m.  to  5  p.  m. 

2 .  You  are  asked  by  the  president  of  the  company  to  make  an  exami- 
nation of  the  books  of  a  large  dry  goods  jobbing  house,  the  examination 
to  be  of  sufficient  scope  to  justify  your  certification  to  a  balance  sheet 
and  profit  and  loss  account  for  the  year  ended  on  June  30,  1909. 

Your  examination  is  also  intended  to  disclose  any  evidence  of  fraudu- 
lent manipulation  of  the  accounts. 

Give  a  brief  outline  of  the  scope  of  your  examination,  particularly  as 
to  the  verification  of  cash,  securities,  bills  and  accounts  receivable,  and 
merchandise. 

Assuming  then  that  the  results  of  your  examination  are  satisfactory, 
give  a  form  of  certificate  that  you  would  propose  issuing  to  your  client. 

3.  In  imdertaking  an  audit  of  the  accoimts  of  a  borough,  to  what 
source  or  sources  would  you  go  to  verify  the  items  of  receipts,  and  in 
what  form  would  you  expect  to  find  the  authority  for  disbursements 
made  by  the  treasurer? 

4.  Is  a  system  of  cost  accounts  that  gives  satisfactory  results  in  a 
machine  shop  adaptable  to  a  bituminous  coal  mine?  If  you  think  it  is 
not,  state  your  reasons.  If  you  think  it  is  adaptable  without  fundamental 
change,  show  what  modifications  would  be  required. 

5.  The  North  &  South  R.  R.  Company  has  demolished  its  old  wooden 
station  at  a  certain  city  on  its  line  and  has  erected  in  its  place  a  larger  and 
more  ornate  structure  of  brick  and  stone  at  a  cost  of  $100,000  in  excess 
of  the  book  value  of  the  old  building  after  deducting  the  salvage.  Bear- 
ing in  mind  that  this  expenditure  of  $100,000  does  not  materially  increase 
the  earning  capacity  nor  decrease  the  operating  expenses  of  the  company, 
what  disposition  should  be  made  of  this  item  in  the  accounts?  State 
the  general  principles  that  should  govern  an  accountant  in  dealing  with 
this  class  of  expenditure,  whether  occuring  in  a  railroad  or  any  other 
property. 

9  a.  m.  to  I  p.  m. 

BLANK   FIRE   INSURANCE   COMPANY 

Trial  Balance,  December  31,  1908. 

6 .     Stocks  and  bonds  (book  value) $3,000,000 .00 

Mortgage  loans 1,000,000 .00 

Interest  receivable  an  mortgage  loans.  1,000 .00 

Real  estate 500,000 .00 

Cash  at  banks  and  on  hand 300,000 .00 

Uncollected  premiums 500,000 .00 

379 


•1  . 


Accounting  Problems  and  Solutions. 


|i 


!'• 


K:",'. 


:jf 


Capital  stock 

Unpaid  dividends 

Surplus  account,  January  i,  1908 

Gross  premiums 

Return  premiums 5.5oo  •  0° 

Income  from  stocks  and  bonds 

Interest  on  mortgage  loans 

Rents  received 

Losses 210,000.00 

Reinsurance  premiums 10,000 .00 

Commissions 5,000 .00 

Taxes 4,000.00 

Salaries 40,000 .  00 

Uncollectable  premiums 3,000 .00 

Rebates 200 .00 

Real  estate  expenses 5,000 .00 

Real  estate  losses 3,000 .00 

Postage 500  ■  00 

Legal  expenses 500 .  00 

Maps 15,000.00 

Underwriters'  boards  and  tariff  asso- 
ciations   30,000 .  00 

Inspections  and  surveys 2,000 .00 

General  expenses 5°°  •  0° 


$  500,000.00 

100,000.00 

2,000,000.00 

3,000,000.00 

25,000.00 

10,000.00 

200.00 


$5,635,200.00     $5,635,200.00 

From  the  foregoing  trial  balance  prepare  a  balance  sheet  at  December 
31,  1908,  and  the  relative  income  account  for  the  year  ending  that  date. 
Describe  what  procedure  you  would  adopt  in  verifying  the  assets  and 
liabilities.     Make  any  criticisms  in  respect  of  reserves  apparently  omitted. 
7.     William  Hodson  died  on  July  15,  1908,  leaving  the  following  estate: 
$10,000  Water  Company  bonds,  appraised  ©95 
50,000  Steel  Company  bonds,  appraised  @  105 
40,000  Electric  Light  Company  bonds,  appraised  @  90 
15,000  Cash. 
1000  Shares  Steel  Company  stock,  appraised  @  94 
50  Shares  Water  Company  stock,  appraised  @  70 
60  Shares  Pennsylvania  Railroad  stock,  appraised  ©65 
20  Houses,  assessed  at  $3000  each  and  subject  to  mortgages  of 
$1500  on  each 
Household  furniture  appraised  at  $1000  is  bequeathed  to  the  widow 
Horses,  carriages,  etc.,  appraised  at  $800 
The  will  named  Henry  Wilson  as  executor,  and  gave  him  full  power  to 
sell  real  estate  and  convert  the  assets  of  the  estate  in  accordance  with  his 
best  judgment. 

In  accordance  with  this  authority  the  executor  sold: 
Horses,  carriages,  etc.,  @  $850 
$10,000  Water  Company  bonds  ©98 
1000  Shares  Steel  Company  stock  ©95 
50  Shares  Water  Company  stock  @  60 
40,000  Electric  Light  Company  bonds  @  91 
Four  houses  @  $3200  each 

380 


C.  P.  A.  Examination  Questions. 

In  addition  to  these  receipts  he  also  received : 

Sale  of  rights  to  subscribe  to  new  stock  of  the  Pennsylvania 

Railroad $     go 

Rental  of  houses 5000 

Interest  on  bonds 1 500 

Dividends  on  stocks 3000 

The  executor  made  the  following  disbursements: 

Funeral  expenses $^500 

Decedent's  debts 3000 

Repairs,  water  rents  and  taxes  on  real  estate 2500 

Mortgages  on  properties  sold 6000 

Interest  on  Mortgages 1400 

Prepare  an  account  for  the  executor  to  file.  In  preparing  this  account 
give  attention  to  the  form  and  arrangement. 

2  p.  m.  to  5  p.  m. 

8.  What  are  the  requirements  of  the  National  Bank  Act — 

A.  As  to  investments? 

B.  As  to  cash  reserve? 

C.  What  items  are  applicable  to  reserve? 

9.  What  responsibilities  do  the  board  of  directors  of  a  saving  bank 
assume,  under  the  laws  of  Pennsylvania,  as  to  a  deficit? 

10.  Give  a  brief  outline  of  the  principal  points  to  be  covered  in  an 
audit  of  a  trust  company  doing  a  banking  and  saving  fund  business  in 
addition  to  its  trust  business. 

11.  In  the  annual  report  of  a  life  insurance  company,  what  does  a 
reserve  mean,  how  is  it  arrived  at,  and  how  does  it  affect  the  results  of 
the  business? 

9  a.  m.  to  r.  p.  m. 

12.  A  is  an  operating  company  and  B  is  a  holding  company.  The 
following  statements  are  taken  from  the  books  of  the  respective  com- 
panies, viz.: 

A   COMPANY 

ASSETS 

Cash  on  hand $35,000.00 

Book  accounts  receivable 25,000 .00 

Stock  inventory 21,000 .00 

$81,000.00 

Prepaid  accounts 7,000 .  00 

Sinkng  fund  trustee 1 5,000 .00 

Premiums  on  sinking  fimd  bonds 700 .00 

B  Company  advances 45,000 .  00 

Investments,  B  Company  stock 25,000 . 00 

Other  investments 5,000 . 00 

Plant,  franchises,  etc 1,400,000 .00 

$1,578,700.00 
381 


\ 


I 


Accounting  Problems  and  Solutions. 


LIABILITIES 

Book  accounts  payable $12,000 .00 

Wages 8,000.00 

Bills  payable 50,000 .00 

Accrued  accounts 12,000 .00 

Reserve  accounts 

Bonds 

Capital  stock 

Surplus 


B   COMPANY 

ASSETS 

Cash  on  hand $14,000.00 

Accovints  receivable 6,000 .00 

Investments — 

A  Company's  stock 500,000.00 

Other  investments 500,000 .  00 

Plant,  franchises,  etc 

Deficit 

LIABILITIES 

Book  accotmts  payable $  7,000 . 00 

Bills  payable 130,000 .  00 

Accrued  accounts 10,000 .00 

Due  A  Company 

Bonds  issued 

Capital  stock  issued 


$     82,000.00 

65,000.00 

750,000 .00 

500,000.00 

181,700.00 

$1,578,700.00 


$20,000 .00 


$1,000,000.00 

1,250,000.00 

22,000.00 

$2,292,000.00 


$   147,000.00 

45,000.00 

1,100,000 .00 

1,000,000 .00 

$2,292,000.00 


iiii 

ml 

II I  "It 


ft  ill! 


II. 


('! 


! 


Prepare  a  statement  combining  the  assets  and  liabilities  of  the  two 
companies. 

13.  The  trading  accounts  of  a  company  covering  two  years  are  here- 
with submitted.  Analyze  the  accotmts  and  make  a  report  to  the  company, 
showing  the  reasons  for  the  difference  in  results. 

1908 

Mdse  inventory,  1/1/08 $150,000 

Mdse.  purchases 633,000 

Mdse.  Sales  (Travelers) 600,000 

Mdse.  Sales  (Domestic) 150,000 

Mdse.  Sales  (Cash) 10,000 

Commissions  Paid  Travelers 30,000 

Salaries  Paid  Travelers 30,000 

Salaries  (Domestic  Sales) 15.000 

Rental 5.ooo 

Stationery,  etc 3»ooo 

Expense 22,000 

Interest 4,ooo 

Inventory,  1/1/09 125,000 

382 


11 1 1   ' 


CP.A,  Examination  Questions. 


1909 

Mdse.  inventory,  1/1/09 $125,000 

Mdse.  purchase 600,000 

Mdse,  Sales  (Travelers) 600,000 

Mdse.  Sales  (Domestic) 150^000 

Mdse.  Sales  (Cash) ]  io[ooo 

Commissions  Paid  Travelers 30^000 

Salaries  Paid  Travelers lo'ooo 

Salaries  (Domestic  Sales) lo^ooo 

Rental 5,'ooo 

Stationery,  etc 3,000 

Expense .../.....'.  i5',ooo 

Interest 1,000 

Mdse.  inventory,  i/i/io 125,000 

2  p.  m.  to  5  p.  m. 

14-  Describe  a  system  of  internal  check  for  use  in  a  Gas  Company 
to  protect  it  from  loss  of  revenue. 

15.  What  methods  would  you  adopt  in  an  audit  of  a  Street  and  Inter- 
urban  Railway  to  prove  the  earnings? 

If  you  found  that  proper  precautions  had  not  been  taken,  describe 
the  plans  you  would  recommend  to  such  a  company  so  as  to  insure  the 
collection  of  all  of  its  earnings. 


Commercial  Law. 

Examination,  November,  1909 — 9  a.  m.  to  i  p.  m. 

1.  B  verbally  requested  A  to  do  certain  carpenter  work  around  his 
house  in  the  nature  of  repairs.  B  died.  A  subsequently  performed 
the  work  and  brought  suit  against  the  administrators  for  the  price. 
Can  he  recover?     If  so,  why  so;  if  not,  why  not? 

2.  Thomas  Hunter  received  an  order  from  Henry  Johnson  for  some 
goods  amounting  in  value  to  $500.  Himter  was  not  altogether  satisfied 
about  Johnson's  financial  responsibility,  and  called  up  a  brother  merchant 
named  Butler,  upon  the  telephone,  and  asked  him  as  to  Johnson's 
credit.  Butler  said,  "You  can  sell  him  the  goods;  if  he  don't  pay  you  I 
will."  Accordingly,  Hunter  shipped  the  goods,  Johnson  failed  to  pay,  and 
Htmter  brought  suit  against  Butler  for  the  price.  Is  he  entitled  to 
recover?     Give  reasons  for  your  answer. 

3.  One  Harbison  held  the  note  of  one  Green  for  $1500,  which  was 
about  to  fall  due.  Green  was  cashier  of  the  First  National  Bank,  and  as 
the  note  was  about  to  mature,  Harbison  spoke  to  him  about  it.  Green 
said  it  was  all  right,  and  that  on  maturity  he  would  deposit  to  Harbison's 
credit  in  the  bank  the  amount  of  the  note.  This,  however,  he  did  not  do. 
Harbison,  believing  that  he  had  done  so,  drew  against  his  deposit  to  the 
amount  of  the  debt,  and  the  checks  were  paid  by  the  bank  on  presenta- 

383 


Accounting  Problems  and  Solutions. 


m 


ii!'-...f 


tion.  Subsequently  the  bank  failed  and  went  into  the  hands  of  a  receiver 
and  the  cashier  became  bankrupt.  Harbison's  account  on  the  books 
of  the  bank  showed  that  he  was  overdrawn  to  the  amount  of  the  $1500 
which  he  supposed  Green  had  deposited  to  his  credit,  and  the  receiver 
of  the  bank  brought  suit  to  recover  the  amount  of  the  overdraft.  Is 
Harbison  liable  or  not,  and  why? 

4.  A  owned  $10,000  of  the  first  mortgage  bonds  of  the  Atlantic  & 
Pacific  Railroad  Company.  His  house  was  broken  into  and  the  bonds 
were  stolen.  About  two  weeks  afterwards  he  discovered  the  bonds  in 
the  hands  of  B  and  demanded  their  return.  B  had  purchased  the  bonds 
from  one  C  in  good  faith,  without  any  knowledge  of  their  being  stolen, 
and  had  paid  $10,000  therefor.  Notwithstanding  this  fact,  A  brought 
suit  to  recover  the  bonds.  Is  he  entitled  to  do  so?  Give  the  reasons 
for  your  answer. 

5.  One  Alexander  was  a  member  of  a  partnership  association  or- 
ganized under  the  Act  of  1874.  The  by-laws  of  the  association  contained 
no  provisions  whatever  relating  to  the  transfer  of  the  interests  of  the 
members.  Alexander  died.  The  joint  stock  association  was  engaged  in 
a  mining  enterprise,  and  at  the  time  of  his  death  owed  large  sums  of 
money  which  it  would  have  been  unable  to  pay  unless  the  mine  proved 
to  be  successful  and  profitable,  which  at  the  time  of  his  death  it  was  not. 
Nothing  was  done  by  the  administrators  of  Alexander  with  relation  to 
the  association  for  a  period  of  about  two  years,  when  the  mine  suddenly 
became  largely  profitable  and  the  question  arose  as  to  what  their  rights. 
were.     State  the  nature  and  extent  of  their  rights  under  the  circumstances. 

2  p.  m.  to  5  p.  m. 

6.  One  Williams  had  a  life  insurance  policy  in  the  American  Life 
Insurance  Company  for  $10,000.  The  policy  provided  that  if  the  annual 
premium  was  not  paid  on  the  day  it  became  due  the  policy  should  become 
void.  Williams  became  ill  and  failed  to  pay  the  premium  on  the  day 
it  was  due,  and  about  a  week  afterwards  his  son  came  to  the  office  of  the 
company  and  saw  the  president,  told  him  his  father  was  ill,  but  the  presi- 
dent said  that  if  he  would  pay  the  premiums  within  one  week  it  would  be 
all  right.  Williams  died  the  following  day,  and  afterwards,  and  before 
the  week  elapsed,  the  son  came  and  tendered  the  premium,  which  the 
company  declined  to  receive,  and  denied  any  liability  on  the  policy. 
Is  it  liable  thereon?     Give  your  reasons  for  your  answer. 

7.  The  firm  of  James  W.  Curtis  &  Company,  composed  of  James  W. 
Curtis,  Charles  Curtis,  his  son,  and  Thomas  Mason,  had  been  in  the  dry 
goods 'business  for  many  years,  Jam.es  W.  Curtis,  becoming  old,  retired 
from  the  business.  By  the  agreement  between  them  it  was  agreed  that 
he  should  not  withdraw  his  money  as  a  partner,  but  that  it  should  remain 
on  the  books  as  a  loan  to  the  firm,  with  interest  at  the  rate  of  6  per  cent. ; 
that  the  business  should  be  continued  by  the  remaining  two  partners 
under  the  same  firm  name.  This  continued  for  three  years,  when  the 
firm  became  insolvent  and  the  creditors  made  claim  against  James  W. 

384 


C.  p.  A.  Examination  Questions. 

Curtis  for  payment  of  the  debts  incurred  by  the  firm  after  he  had  with- 
drawn.   Is  he  liable  therefor?     Give  the  reasons  for  your  answer. 

8.  A  held  a  bond  and  mortgage  secured  upon  real  estate  in  the  city 
of  Philadelphia,  executed  by  one  B  for  the  sum  of  $5000.  B  paid  A  in 
installments  from  time  to  time  until  he  had  paid  oflE  all  the  mortgage 
except  $1000.  A,  being  insolvent  and  in  need  of  money,  assigned  the 
mortgage  to  C,  receiving  from  him  $5000,  its  full  face  value.  Afterwards 
B  tendered  to  C  the  $1000  still  due,  and  demanded  satisfaction  of  the 
mortgage,  which  C  refused,  and  brought  suit  to  foreclose  the  mortgage. 
Is  C  entitled  to  recover  the  full  amount?  Give  the  reasons  for  your 
answer. 

9.  A's  wife  had  been  ill  and  under  the  care  of  the  family  physician 
for  about  six  months  without  any  apparent  improvement  in  her  condi- 
tion. The  family  physician  said  to  A  that  he  was  doubtful  of  the  exact 
nature  of  the  disease,  and  that  he  would  like  to  consult  with  a  specialist. 
A  said  he  was  willing  that  he  should  do  so.  The  family  physician  called 
in  the  specialist,  who  confirmed  and  approved  his  diagnosis.  This  after- 
wards proved  to  be  eroneous.  The  wife  recovered,  the  family  physician 
sent  in  his  bill,  which  A  paid.  Afterwards  the  specialist  sent  in  a  bill 
for  his  services,  and,  A  refusing  to  pay,  brought  suit,  to  which  A  made 
the  defence  that  he  did  not  employ  the  specialist,  and  that  his  diagnosis 
was  erroneous.     Can  or  can  not  the  specialist  recover,  and  why? 

10.  A  was  a  cashier  of  the  Second  National  Bank.  B  was  a  depositor 
therein,  and  was  on  his  way  to  the  bank  one  day  to  make  a  deposit; 
when  about  half  way  to  the  bank  he  met  the  cashier,  stopped  him,  told 
him  he  was  about  to  make  the  deposit,  and  asked  him  if  he  would  take 
the  money  there.  The  cashier  agreed,  took  the  money,  made  the  proper 
entry  in  the  deposit  book,  and  handed  it  back  to  B.  A,  the  cashier, 
however,  did  not  put  the  money  to  B's  credit,  but  kept  it  and  converted 
it  to  his  own  use,  and  B  sued  the  bank  for  the  amount.  Is  he  or  is  he  not 
entitled  to  recover? 


385 


K  V 


INDEX 


J" 


11 

'  I'll 
i  fiii 


■fii 


I'll,  ( 


[If,, 


Acceptance 

Definition  of 212 

Accounts 

Division  of 173 

Adjustment  of 

Capital  accounts.. .  11,  13,  134-135 

Goodwill 15 

Interest  on  capital 5o»74 

Insurance  loss 70 

Adjustment 

Journal  entries  for 112 

Statement  form  of 145,  160 

Adjustment  of  Partnership  Ac- 
counts 
When  absorbed  by  a  corpora- 
tion  59-61 

When    books    were    kept    by 

single  entry 7 

When    books   were   kept    by 

double  entry 20 

When  there  is  a  loss 39 

Admitting  New  Partner 5 

Adjusting  capital  Acc'ts  on.. .     44 
Problems  in 71 

Adventures 

Definition  of 195 

Agreement  Between  Partners. .  .    1-4 

As  to  division  of  profits 5 

As  to  goodwill 5 

Analysis  of  Ledger 

Form  for 96 

Annuity  System 

Definition  of 199 

Arrears    in    Cumulative    Stock 
Appearance   in  balance  sheet 
^  of 207 

Articles  of  Co-partnership 4 

Articulation  Statement 

Form  of 96 

Assets 

At  dissolution  of  partnership.        7 

Definition  of  fixed 185 

Definition  of  current 185 

Statement  form  showing  in- 
crease and  decrease  of 48 

Insufficiency  of 20 

Organization  expenses  as 205 

Assets  and  Liabilities 

Statement  of 56,80 

Statement  of,  from  books  kept 
by  single  entry 8 

Assets  of  Partnership 

Bought  by  a  corporation. .  .  .  58-62 

387 


Form  of. 


Page 
Auditing 

Questions  in 200-202 

Answers  in 202-208 

Auditor 

Books  to  be  examined  by. .  .  .    207 
Duties  regarding  inventories . .    208 

Auditor's  Verification 

Of  balance-sheet 205 

Of  profit  and  loss  acc't 205 

Audits 

Kinds  of 207 

Balance  Sheet 

Comparative 49,62 

Definition  of 170,  186-187 

English   and  American,   con- 
trasted     170 

'  19,  32,   46,  52,  57,  64, 
75,  88,   91,    92,       107, 
114,  128,  147.  233,  311, 
^    1314,  354 

rorm  of  comparative 49 

Items  to  be  certified  in 205 

Position  for  cash  acc't  in 163 

Purpose  of 187 

Valuation  of  assets  in 207 

Bankrupts 

Definition  of  voluntary 213 

Definition  of  involiuitary 2 13 

Bankruptcy 

Appomtment  of  trustee  in 214 

Courts  of  jurisdiction  in 213 

Of  corporation 213 

Of  partnership 213 

Bankruptcy  Laws 

Object  of  passing 214 

Beneficiaries 

Statement  of  payments  to cc 

Bill  of  Exchange 

Definition  of 212 

Bills  Receivable  Discounted 

Auditing  of,  for  bank 208 

Bonds 

Definition  of  income 196 

Definition  of  Mortgage 196 

Distinguishing  features  of  col- 
lateral trust 196 

Distinguishing      features      of 

Mortgage 196 

Charge  of  cost  of  selling 203 

Sold  at  a  discotmt 203 

Sold  at  a  premium 203 

Verification  of 204 


I 


ft 


i 


I  ■"■ 


Index, 


Index. 


an 

204 
37 

50 
205 


Page 

Books  ,. 

To  be  examined  by  the  auditor  207 

Voucher  record i9<^ 

Books  of  a  Corporation 

Relating  to  stock 184,   191 

Book  Debts 

Auditing  of •  •  •  •  •    208 

Building  and  Loan  Association 

Essentials  of  a  complete  audit 
of ao5 

Capital 

Amoimt  to  be  paid  m 

Charged  against,  for  equip- 
ment   • 

Deficiency  of,  treated  as  a 
loss •••.••■ 

Interest  charged  on  deficiency 

of 

Proper  charges  against • 

Provisions  for,  in  Articles  of 

Co-partnership 5 

Capital  Accounts 

Adjustment  of n.  i3'!i4. 

f  16,  26,  33,  35,  36.  39' 

Forms  of.  \  57.  72,  73'  74.  94.  ^34 

135.      143.      144.  145 
Statement    form    for    adjust- 

ing ^45.  160 

Capital  Expenditure 

Definition  of i97.  204 

Capital  Stock 

Forms  of 186,  191 

Formation  of ^9^ 

How  shown  in  balance  sheet..  183 

Rights  of  holders  of 191 

To  determine  value  of 81 

Cash 

Verification  of 9'   203 

Cash  Book 

Verification  of 208 

Cash  Account 

Best  method  of  conducting..  .  205 

Place  for  in  balance  sheet. ...  163 

Properly  handled 208 

Verification  of 203 

Certification  of  Incorporation ...  211 

Certificate  of  Stock 

Verification  of 204 

Certified  Check 

Liabilities  of  parties  to 214 

Changing  from  Single  to  double 

Entry ^7 

Charges 

Against  capital 205 

Against  revenue 205 

Clauses     in     Articles     of     Co- 
partnership  4»  5'  6 


Pftge 


Clearing  House 

Description  of ^94 

Purpose  of ^93 

Collateral  Trust  Bonds 

Distinguishing  features  of . . .  .   196 
Commercial  Law 

Answers  in 21 1-2 16 

Questions  in 209-210 

Common  Law 

Definition  of 216 

Comparative  Balance  Sheet 

Advantages  of 163 

Consideration 

Definition  of 211 

Consignments 

Treatment  of i9S 

Contingent  Liabilities 

Examples  of 208 

Treatment  of 208 

Contract 

Definition  of 211 

Definition  of  express 212 

Definition  of  implied 212 

Of  guarantee  and  suretyship..   213 
When  required  to  be  in  writ- 
ing  214,  215 

Corporation 

As  a  bankrupt 213 

Definition  of 211,  213 

Definition  of  private 212 

Definition  of  public 212 

Dissolution  of 215 

Kinds  of :■••/•   ^14 

Procedure  for  dissolution  of.  .    215 
Procedure  for  formation  of . . .   211 

Cost  Accounts 

Factory  expense  acc't 99 

Finished  goods 1 00 

Form  of  finished  goods  acc't.    104 
Management  expense  acc't. .  .     99 

Manufacturing  acc't 100 

Material  acc't 103 

Payroll  acc't 98 

Problems  in 97' 

Raw  materials  acc't 98 

Cumulative  Stock 

Appearance  in  balance  sheet 

of 207 

Daily  Banking 

Advantages  of 208 

Days  of  Grace 

Definition  of 212 

Deficiency  Accoimt 

Forms  of 66,  1 10,   138 

Depreciation 

Entries  for  providing  for,  44.  73'  77 
Proper    rate    for    allowances 
for 204,  205 


20 
6 


77 


192 


Page 
Depreciation — Continued 

Providing   for 74,  77 

Reserves  for 90 

Depreciation  Account 

How  created 186 

Purpose  of 185 

Directors  of  Corporation 

Selection  of 211 

Number  of 211 

Directors*  Fees 

Authority  required  to  pay 204 

Discount 

On  sale  of  bonds 203 

Dissolution  of  Corporation 213 

Procedure  for 215 

Dissolution  of  Partnership 

Problems  in 7, 

Reasons  for 

Dividends 

Journal    entries    to    provide 

for 

Dividend  Arrears 

Appearance  in  balance  sheet 

of 

Dividend  Book 

Description  of 184 

Double  Entry 

Principles  of 187 

Drafts 

Accepted  and  discounted 187 

Journal  entries  for 187 

Duties  of  Auditors 

Regarding  inventories 208 

Endorser 

Liability  of 214 

Estates 

Settlement  of 53 

Executors 

Inventory  of  estate 53 

Statement  of  commissions  of.     55 
Statements    of    payments   to 

beneficiaries  by 55 

Summary      statement      and 

schedtu©  for  surrogate 53 

Expenses 

Divisions      and      subdivision 

^      o^-- 19s.   196 

Express  Contract 

Definition  of 212 

Formation  of  Corporation 

Procedure  for 211 

Formation  of  Partnership 4 

Problem  in 92,   154 

Goodwill 

Adjustment  of 167,  204 

Adjustment  of,  on  admitting 
new  partner 5 

Adjustment  of,  on  death  of 
partner 15 


Pace 


388 


Go  od  will — Continued 

Appearance  in  balance  sheet 

of 204 

Apportioned 15.  31 

As  fixed  capital 205,  206 

Charged  off 6i 

Definition  of 189 

Determined  from  profits  for  a 

number  of  periods 15 

Explanation  of 189 

Journal  entries  to  place  on  the 

books 31.  72,  73 

Overpaid  for 193 

Placed  on  the  books 17 

Placing  value  on 166,   167 

Propriety  to  open  accoimt  with  204 

Writing  off 205-6 

Goodwill  Account 

How  created 186 

Purpose  of 186 

Guarantee 

Definition  of  contract  of 213 

Hidden  Reserves 

See  secret  reserves 
Hire  Agreement 

Definition  of 194 

Installment  Book 

Description  of 184 

Implied  Contract 

Definition  of 212 

Income  Bonds 

Definition  of 189,   196 

Income    and    Expenditure    Ac- 
count 

Definition  of 189 

Incorporators 

Number  required 211 

Insurance 

Claims  disproven 70 

Reserve  for 162 

Insurance  Fund 

Journal  entries  for 161 

Interset 

Allowed  on  excess  of  required 

capital 50 

Charged  on  withdrawals. .  1 74,   175 
Interest  Account 

Adjustment  of 50,  74 

Involuntary  Bankrupt 

Definition  of 213 

Inventory 

Duty  of  auditor  regarding.. .  .   208 

Placing  value  on 204,   192 

Treatment  of  at  end  of  period  192 
Joint  Accounts 

Definition  of 195 

Joint  Adventure  Account 

Form  of 130-132 

Journal  entries  for 129-133 


389 


Index. 


\  ,r 


Paae 
Journal  Entries  for 

Absorption  of  partnership  by 

a  corporation 148,   149 

Adjustment 112 

Closing  books 44 

Correcting  inventories 73 

Creating  reserves 77 

Drafts 187 

Increase  of  value  of  real  estate  193 

Installment  notes 193 

Joint  adventure  acc't. .  .  .129,   133 

Loss  by  fire ^93 

Notes  receivable  discotmted. .     93 
Opening    books    of    corpora- 
tion  59.  "5'  116,   148 

Placing  full  value  of  goodwill 

on  the  books 72*    73 

Protested  notes. 193 

Providing  for  dividends 77 

Providing  for  depreciation... .      77 
Sinking  fimds "8 

Labor 

Overtime  treated 107 

Law  Merchant 

Definition  of 216 

Leasehold 

Treatment  of  on  books 208 

Treatment     of,     in     balance 
sheet 208 

Ledgers 

Definition  of  Stock 190 

Form  of  Depositors 123,   124 

Form  of  Stock 62.  191 

Ledger  Accounts 

Opening  of,  that  control  cost 
acc't 98 

Liabilities 

Definition  of  fixed 185 

Definition  of  current 185 

Examples  of  Contingent 208 

Liquidation 

Adjustment  of  acc't  during. .     64 

Losses 

How  made  good 0 

Loss  and  Gain 

Methods  to  determine  profits .    190 
Divided  in  proportion  to  cap- 
ital invested 5^.  57 

Matters 

Looked  into  for  intended  pur- 
chaser     207 

Manufacturing  Account 

Of  cost  accoimt 100 

Form  of 86,  103,   127 

Showing  cost  of  production ....   127 
Valuation  of  raw  materials  in  207 
Valuation  of  product  in  pro- 
cess     207 


Page 
Manufacturing  Account — CorUinued 
Valuation     of    manufactured 

product 207 

Valuation  of  bills  receivable .  .    207 
Valuation  of  accoimts  receiv- 
able     207 

Manufacturing  Statement 

Form  of 79 

Merchandise  Account 

Closing  of 56 

Definition  of 185 

Divisions  of 188 

How  it  should  be  kept 185 

Method  of  keeping 188 

Minute  Book 

Description  of 184 

Mortgages 

Insufficiency    of    chattels    to 

meet 172 

Mortgage  Bonds 

Definition  of 196 

Distinguishing  features  of . . .  .   196 
Mortgages  on  Real  Estate 

Verification  of 204 

Negotiable  Instruments 

Effect  of  alteration  of 214 

Essential  requisites  of 213,  214 

Negotiable    Promissory    Notes..    214 
Net  Profit 

Definition  of 190 

Disposition  of 190 

Notes   Receivable   Discounted.       93 
How  supplied  when  missing.  .    165 
Officers  oif  a  Corporation 

Selection  of 212 

Organization  Expenses 

How  to  deal  with 205 

Writing  off 9° 

Overhead  Charges 

Distribution  of 102 

Partners 

Definition  of  public 213 

Definition  of  secret 213 

Partners  Accounts 

Closing  of 57 

Partnerships 

Absorbed  by  a  corporation. .  58-62 

As  a  bankrupt 213 

Definition  01. 214 

Partnerships 

Kinds  of 216 

Legal  definition  of i 

Partnership  Accounts 

Adjustment  of 1-40 

Adjustment  of  interest  on.. .  .      50 
Statement     form     of  adjust- 
ing  i45»   160 

Payment  of  a  Debt 

In  annual  equal  payments.. .  .      16 

390 


Index. 


203 
102 


_  Page 

Petty  Cash 

Best  methods  of  conducting.  .    205 

Preferred  Claims 

Treated    in  statement  of  Af- 

_      fairs 66,67,109 

Preferred  Stock 

Advantages  of  holders  of 186 

How  to  guard  holders  of .  .  .  .    203 
Why  issued 186 

Premium  on  Sale  of  Bonds.  . . 

Prime  Cost 

Problems 

England,  1907..  125,  129,  133,   136 

Ilhnois,  1903 56 

Illinois,  1906 82 

Michigan,  1906 85 

Michigan,  1908 146,    154 

New  York,  1898 43,  47,  50 

New  York,  1900 C2 

New  York,  1903 53 

New  York,  1906 63,  65,  89 

New  York,  1907 95,    97, 

105,  108,   118 

New  York,  1909 69 

New  York  University 78 

Pennsylvania,  1905 58 

State  of  Washington,  1906.  .92,  93 
State  of  Washington,  1907  . .  .  m, 

115,   116 
University  of  Pennsylvania....     71 

Procedure 

To  dissolve  a  corporation. ...  215 
To  change  from  single  to  dou- 
ble entry 17 

To  form  a  corporation 211 

Promissory  Note 

Definition  of 212 

Definition  of  negotiable 214 

Liability  of  endorser  on 214 

Profits 

Accounted  for 48,  49 

Comparison  of,  by  percentages  168 

Definition  of  net 190 

Statement  showing  causes  for 

reduction  of 84 

Profit  and  Loss 

Determined  tmder  single  en- 
try    202 

Method  to  determine  net  .196,   197 

Rule  for  adjustment  in  pro- 
portion to  capital  and  time 
invested 27 

Rule  for  finding,   from  book 

kept  by  single  entry 12 

( ^^r    24,    29,    30, 

Form  of j  45,    57,    75,    87, 

„,,...          ,^90,  104.  113,   128 
Subdivisions  of 163 

391 


207 


_-      _  Page 

Profit    and    Loss    Appropriation 
Account 

Form  of i  18,  28,  50,  139, 

[  140,  155-6 

Proof  of  Insurance  Loss 70 

Public  Partners 

Definition  of 213 

Piu-chaser 

Examination  for  an  intended 
Questions 
Auditing 

California,  1908 286 

Florida,  1907 278 

Florida,  1909 361—2 

Illinois,  1906 248 

Illinois,  1908 288 

Illinois,  1909 373-375 

Maryland,  1909 323 

Michigan,  1906 270 

Michigan,  1908 303-305 

Michigan,  1909 348-9 

New  York,  1906 |  236,  237, 

I       263-4 
New  York,  1907 275-6 

New  Y6rk,  1908 I      ^^^S* 

\  299-301 

New  York,  1909  ••  -334-6,  343-4 

Khode  Island,  1907 281-2 

Pennsylvania,  1906 256 

Banks 

New  York,  1908 223 

Pennsylvania,  1907 219-220 

Commercial  Law 

California,  1908 286-7 

Florida,  1907 280 

Florida,  1909 362—3 

Illinois,  1906 247-248 

Illinois,  1908 296-7 

Illinois,  1909 37^ 

Maryland,  1909 324-5 

Michigan,  1906 ; 271 

Michigan,  1908 •307-8 

Michigan,  1909 346-348 

New  York,  1906..  238,  239,  262 

New  York,  1907 277-8 

New  York,  1908 302-3 

New  York,  1909 i  ^^^^  337 

T5           ,        .            .      '^345.  346 
Pennsylvania,  1906 257 

Pennsylvania,  1909 383-385 

Khode  Island,  1908 282-3 

Corporations 

Illinois 242—245 

Michigan 266,  310 

New  York 234,   260 

Pennsylvania 220-222 

Corporation  Bonds 

New  York 234 


f| 


i 


Index. 


m 


Ifl 


Page 
Questions — Continued 
Executor's  Accounts 

Illinois 240 

New  York 235 

Pennsylvania 253 

General  Business  of  the  Ac- 
countant 
England,  1907 225-227 

Joint  Adventure 

New  York,  1906 262 

Partnership 

England,  1907 225 

Michigan,  1906 268 

New  York,  1906 261 

New  York,  1907 272 

New  York,  1909 331,  339 

Practical  Accoimting 

California,  1908 287 

Florida,  1907 278-280 

Florida,  1909 364-368 

Illinois,  1906 240-245 

Illinois,  1908 291-295 

Illinois,  1909 369-373 

Maryland,  1909 315,321 

Michigan,  1906 266-270 

Michigan,  1908 308-315 

New  York,  1906..  .232-236,   259 

New  York,  1907 272-275 

New  York,  1 908... 2 2 3-2 2 4,   297 

(-326-328, 
New  York,  1909 ■  330-334. 

I  339-343 

Pennsylvania,  1906 250-254 

Pennsylvania,  1909 377-383 

Rhode  Island,  1907 302-304 

Procedure  of  Auditors 

England,  1906 227 

Railway  Co. 

Pennsylvania,  1906 252 

Syndicate 

New  York,  1908 223 

Theory  of  Accounts 

California,  1908 286 

Florida,  1907 280 

Florida,  1909 359-3^1 

Illinois,  1907 246-247 

Illinois,  1909 376-7 

Illinois,  1908 285 

Michigan,  1906 270 

Michigan,  1908 307 

New  York,  1906 231,  258 

New  York,  1907 276 

New  York,  1908. .  .224,  298-299 

New  York,  XP09 {  ^^ /"J/;^ 

Pennsylvania,  1906.... 254,  255 

Rhode  Island,  1907 285 

Rate  of  Depreciation 204 


Page 

Real  Estate 

Verification  of  mortgage  on .  .    203 
Verification  of 203 

Realization  and  Liquidation 

By  trustee 105 

Realization      and      Liquidation 
Account 

Division  of 171,   172 

Form  of 38,  63,   106 

Form   of  Receipts   and  Expen- 
ditures 
Form  of  statement  of 10 

Repairs  and  Renewals 

How  to  be  treated 189 

Reserves 

By  a  cash  Investment 176 

Definition  of  Secret 189 

Entries  for  creating 77 

How  treated  in  balance  sheet .    169 

Reserve  Account 

Definition  of 188 

Reserve  Fund 

Defiinition  of 188 

Reserve  Fund  Account 

How  created 185 

Purpose  of 185 

Revenue 

Charges  against  for  equipment  204 
Proper  charges  against 2 

Revenue  Account 

Form  of  from  trial  balance. . .     52 
When  used 164 

Revenue  Expenditure 

Definition  of 197 

Sale  of  Bonds 

At  a  discount 203 

At  a  premium 203 

Secret  Partner 

Definition  of 213 

Secret  Reserves 

Bona-fide  uses  of 206 

Definition  of 189,  206 

Examples  of 189 

Propriety  in  use  of 207 

Settlement  of  an  Estate 53 

Single  Entry 

Principles  of 187 

Sinking  Fund 

Creation  of 118 

Definition  of 182 

Form  of  depositors'  ledger  of .    123 

How  created 182,   185 

How  treated  on  the  books  of  a 

corporation 182 

Journal  entries  for 1 18-120 

Statement  of  income  and  cash 

acc't  for 121 

Statement    of    principal    and 
funds 122 

392 


Index. 


Page 

Sinking  Fund  Account 

Purpose  of 185 

Statement  of 

Amounts  paid  beneficiaries. .  .  55 

Executors'  commissions 55 

Executor  for  surrogate 55 

Inventory  by  executor 54 

Statement  of  Affairs 

Definition  of 188 

Form  of (  "'  ^<^'  67,  68 

o*  ^  .     X   *  *  ^^°9.  "7.   138 

Statement  of  Assets  and  Liabil- 
ities 

Definition  of 186 

Form  of g,  80 

Statement  Form 

In  adjusting  accoimts..  .  .145,   160 
Showmg  increase  and  decrease 
of  assets ^g 

Statement  of  Profits  and  Losses 
Advantages  of 164 

Statement  of  Receipts  and  Dis- 
bursements 
Definition  of igo 

Statute  Law                                  *       ^ 
Definition  of 216 

Statute  of  Frauds 

Contracts  covered  by 212 

Definition  of 212 

Statute  of  Limitations 

Definition  of 215 

Policy  of * '   215 

Prevented  from  running 211; 

Stock  ^  ^ 

Transfer  of ig^ 

Amount  to  be  paid  in  Illinois .   210 
Verification  of  certificate  of . .   214 

Stock  Certificate  Book 

Description  of 184 

Stockholder 

Liability  of 213 

Rights  of \ , ,   213 

Stock  Ledger " .' .     62 

Definition  of 190 

Description  of ig4 

Nature  of  records  of 190 

Stock  Transfer  Book 

Description  of ig4  . 

Subscription  Book 

Description  of ig4 


Suret3rship  ^^ 

Definition  of  contracts  of 213 

Surrogate 

First  accounting  for 68 

Second  accounting  for 69 

Presentation  to  of  schedules. .     53 
Syllabus 

On  banking 229 

New  York 229 

Pennsylvania 229 

On   Manufacturing  Accotmts 

New  York 229 

Pennsylvania 220 

Trading  Account 

Form  of 44.  86,  90,   127 

Items  in i6q 

Valuation  of  raw  materials  in  207 
Valuation  of  product  in  pro- 
cess     207 

Valuation    of    manufactured 

product 207 

Valuation  of  bills  receivable.   207 
Valuation  of  accounts  receiv- 
able    207 

Trading  Statement 

Definition  of igg 

Form  of «g 

Treasury  Stock V16,  17^ 

Trustee 

Appointment    of,     in     bank- 

ruptcy 214 

Cash  Accotmt  of 64,   106 

Trial  Balance 

Arrangement  of  accotmts  in .  .    173 

Definition  of jgy 

Purpose  of igy 

Ultra-vires  Act 

Definition  of 212 

Usury 

Definition  of 216 

Penalty  for 216 

Valuation  of  Assets  in 

Manufacturing  account 207 

Trading  account 207 

Balance  sheet 207 

Voluntary  Bankrupt 

Definition  of 213 

Voucher  Record  Book 

Explanation  of iqq 

Voucher  System 

Definition  of jg© 


J  ■:; 


393 


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COLUMBIA   UNIVERSITY   LIBRARIES 

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4  •  ,••  - 


■  jlll.lll|i|in  III  II  ojira.  It  A m IB 


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Accountancy  Problems 


WITH  SOLUTIONS 


VOLUME  II 


By 


LEO  GREENDLINGER,  M.C.S.,  C.P.A, 

Assistant  Professor  of  Accounting  in  New  York  University  School 

of  Commerce,  Accounts  and  Finance;  Author  of  "Accounting 

Theory  and  Practice,"  and  Editor  of  the  C.  P.  A.  Question 

Department  of   the  Journal  of  Accountancy. 


Legal  Notes  by 

CHARLES  W.  GERSTENBERG,  Ph.B.,  L.L.B. 

Lecturer  on  Finance  in  New  York  University  School  of  Commerce,  Accounts 

and  Finance;  Author  of  "Special  Phases  of  Corporation  Law," 

and  Member  of  the  New  York  Bar. 


«K 


It 


BUSINESS  BOOK  BUREAU 
NEW  YORK 


■aiiii 


'  ! 


/ 


Copyright  ij,,, 

By 
BUSINESS  BOOK  BUREAU 


I"  I  I 


< I 


"p  4 


r\ 


{    O  K/ 


/ 


Preis  of 

AmwiBw  H.  K.LLOOO  Co. 

N«wyorlc 


PREFACE. 

Like  its  predecessor,  this  volume  is  the  result  of  contributiom 
made  by  the  author  and  a  number  of  other  accountants  to  the 
Journal  of  Accountancy;  new  matter,  however,  has  been  added 
to  make  it  more  complete. 

The  book  is  divided  into  four  parts: 

Part  I  presents  selected  American  C.  P.  A.  prob- 
lems, as  well  as  some  of  the  problems  set  by  the  Eng- 
lish and  Canadian  Societies,  with  full  solutions  and 
exhaustive  comments.  These  problems  cover  the  period 
from  1905  to  191 1,  inclusive;  most  of  the  work,  how- 
ever, is  from  examination  papers  set  in  the  last  three 
years.  The  problems  cover  a  much  wider  variety  of 
topics  than  those  in  Volume  I.  Among  these  topics  are : 
Estate  Accounting;  Partnerships;  Corporate  Affairs; 
Fire  Insurance;  Promoters'  Affairs;  Comparative  Bal- 
ance Sheets ;  Brokers'  Accounts ;  Amalgamations ;  Com- 
mission House  Accounts;  Realization  Affairs;  Qub 
Accounts;  Real  Estate  Companies;  Manufacturing, 
Trading  and  Profit  and  Lx)ss  Statements ;  Bond  Ledger 
Analyses;  Closing  Entries;  Mine  Accounts;  Branch 
House  Accounts ;  Preparation  of  Statements  in  Connec- 
tion with  Fire  Losses ;  Cost  Accounting ;  Determination 
of  Bond  Values  and  of  Percentages  of  Turnover. 

The  author  has  endeavored  to  treat  not  only  the 
principles,  but  the  practical  features  of  every  problem 
either  in  the  solution  proper  or  in  the  comments. 

Part  n  contains  one  hundred  and  eight  selected 
questions  and  answers  on  theory  of  accounts,  auditing 
and  commercial  law;  the  latter  subject  is  the  special 
feature  of  this  part.  It  deals  with  matter  relating  ex- 
clusively to  corporations,  such  as :  Procedure  in  Organiz- 
ing a  Corporation ;  Conveyance  of  Corporate  Property  to 
Directors ;  Payment  for  Capital  Stock ;  Rights  and  their  • 
Negotiability;  Advantages  of  Corporate  Form  against 


1 

i 

A 


/ 


Copyright  19,, 

By 

BUSINESS  BOOK  BUREAU 


f%  .gmmt^  m^^ 


Press  of 

Ai«»««w  H.  K»LLooo  Cb. 

New  York 


PREFACE. 

Like  its  predecessor,  this  volume  is  the  result  of  contributions 
made  by  the  author  and  a  number  of  other  accountants  to  the 
Journal  of  Accountancy;  new  matter,  however,  has  been  added 
to  make  it  more  complete. 

The  book  is  divided  into  four  parts: 

Part  I  presents  selected  American  C.  P.  A.  prob- 
lems, as  well  as  some  of  the  problems  set  by  the  Eng- 
lish and  Canadian  Societies,  with  full  solutions  and 
exhaustive  comments.  These  problems  cover  the  period 
from  1905  to  191 1,  inclusive;  most  of  the  work,  how- 
ever, is  from  examination  papers  set  in  the  last  three 
years.  The  problems  cover  a  much  wider  variety  of 
topics  than  those  in  Volume  I.  Among  these  topics  are : 
Estate  Accounting;  Partnerships;  Corporate  Affairs; 
Fire  Insurance;  Promoters'  Affairs;  Comparative  Bal- 
ance Sheets ;  Brokers'  Accounts ;  Amalgamations ;  Com- 
mission House  Accounts;  Realization  Affairs;  Qub 
Accounts;  Real  Estate  Companies;  Manufacturing, 
Trading  and  Profit  and  Loss  Statements ;  Bond  Ledger 
Analyses;  Closing  Entries;  Mine  Accounts;  Branch 
House  Accounts ;  Preparation  of  Statements  in  Connec- 
tion with  Fire  Losses;  Cost  Accounting;  Determination 
of  Bond  Values  and  of  Percentages  of  Turnover. 

The  author  has  endeavored  to  treat  not  only  the 
principles,  but  the  practical  features  of  every  problem 
either  in  the  solution  proper  or  in  the  comments. 

Part  II  contains  one  hundred  and  eight  selected 
questions  and  answers  on  theory  of  accounts,  auditing 
and  commercial  law;  the  latter  subject  is  the  special 
feature  of  this  part.  It  deals  with  matter  relating  ex- 
clusively to  corporations,  such  as :  Procedure  in  Organiz- 
ing a  Corporation ;  Conveyance  of  Corporate  Property  to 
Directors ;  Payment  for  Capital  Stock ;  Rights  and  their 
Negotiability;  Advantages  of  Corporate  Form  against 


I 


/ 


f 


Partnership;  Stockholders'  Rights  to  Inspection  of 
Books;  Proxies;  Liability  of  Directors  in  connection 
with  Dividends ;  Filing  of  Reports ;  Formation  of  Joint 
Stock  Companies ;  and  many  others. 

As  these  questions  are  taken  from  various  states, 
some  of  the  answers  are  given  both  in  accordance  with 
the  law  of  the  state  where  the  question  originated,  and 
also  in  accordance  with  the  law  of  the  State  of  New 
York. 

In  Part  III  are  presented  papers  containing  ques- 
tions (without  solutions)  set  by  various  State  Boards 
of  Accountancy  on  practical  accounting,  theory  of  ac- 
counts, auditing  and  commercial  law,  with  the  author's 
comments,  in  some  instances,  on  the  makeup  of  these 
papers.  As  in  the  first  volume,  the  author  gives  here  an 
introductory  essay  comparing  and  contrasting  the  stand- 
ards that  prevail  in  the  different  states,  in  order  to  show 
the  progress  of  the  profession. 

To  prevent  the  book  from  being  too  bulky,  some 
questions  that  appear  in  Part  I.  with  solutions,  are  not 
repeated  in  Part  III,  and  only  the  balance  of  the  paper 
is  reproduced. 

The  selected  problems,  questions  and  complete  ex- 
amination papers  are  chosen  from  the  following  states : 
New  York,  New  Jersey.  Pennsylvania,  Rhode  Island, 
Massachusetts,  Illinois.  Michigan,  Maryland,  Ohio, 
Virginia,  Florida  and  Washington. 

Part  IV  contains  a  summary  of  the  Federal  Cor- 
poration Tax  Law,  dealing  with  the  chief  provisions  of 
the  law.  A  synopsis  of  decisions  on  questions  relating 
to  the  special  excise  tax,  issued  by  the  Internal  Revenue 
Department,  is  given  here  in  order  to  assist  those  who 
make  up  the  report  required  by  the  law. 

For  a  clearer  understanding  of  this  law  the  full  text 
of  the  act,  as  well  as  the  latest  rulings  of  the  United 
States  Supreme  Court  on  the  question  of  constitution- 
ality, are  reproduced  in  an  appendix. 

The  author,  as  in  his  previous  work,  does  not  aim  to  present 
new  theories,  but  has  followed  the  prevailing  standard  of  pro- 
cedure and  practice.    Where  differences  of  opinion  are  possible, 


ik 


0 


• 


' 


4 


all  arguments  are  brought  forth  either  in  the  solution  proper  or 
in  the  comments.     In  some  instances  two  solutions  are  given. 

The  author  takes  this  opportunity  to  express  his  sincere  ap- 
preciation to  the  following  gentlemen  for  their  valuable  con- 
tributions to  the  Journal  of  Accountancy,  of  which  he  has  availed 
himself:  Mr.  Arthur  Wilmot,  C.  P.  A.,  Mr.  James  F.  Ruark, 
C.  P.  A.,  Mr.  Gustave  Jacobsson,  M.  A.,  Dr.  J.  J.  Klein,  C.  P.  A., 
Mr.  Carl  H.  Nau,  C.  P.  A.,  Mr.  W.  A.  Vine,  Mr.  Norbert  New- 
man, and  Mr.  A.  H.  Herschel ;  also  to  Mr.  Max  Meyer,  C.  P.  A., 
and  to  Mr.  Joseph  Lichtenberg,  B.  C.  S.',  who  have  assisted  in 
the  difficult  task  of  proof-reading.  / 

The  author  hopes  that  his  readers  will  favor  him  with  their 
frank  criticisms  and  corrections.  Whatever  improvements  over 
Volume  I  may  be  found  in  this  volume  are  in  a  large  measure 
due  to  their  suggestions. 

Leo  Greendlinger. 
New  York  University, 
32  Waverly  Place, 
New  York,  N.  Y. 

September,  191 1. 


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Problem  I. 

(New  York  Ezaminatioii,  June,  1905.) 

Three  men,  located  respectively  at  New  York,  Chicago,  and  Minneapo- 
lis, conducted  a  business  as  partners.  The  partnership  agreement  recited 
that  the  New  York  partner  was  to  receive  a  salary  of  $5,000  a  year,  the 
Chicago  partner  a  salary  of  $3,000  a  year  and  one-third  of  the  profits  of 
that  branch,  and  the  Minneapolis  partner  a  salary  of  $2,000  a  year  and 
one-fourth  of  the  profits  of  that  branch.  Six  per  cent,  interest  was  to  be 
allowed  on  the  capital  used  in  the  business,  $500,000,  which  was  employed 
one-half  at  New  York,  one-third  at  Chicago  and  one-sixth  at  Minneapolis. 
Repairs  and  renewals  were  to  be  charged  to  plant,  and  a  depreciation  of 
six  per  cent,  per  annum  was  to  be  allowed.  Interest  on  borrowed  money 
was  to  be  distributed  according  to  the  invested  capital  at  each  branch. 
Plant  account  at  the  beginning  of  the  period  showed  as  follows:  New 
York,  $250,000;  Chicago,  $200,000;  Minneapolis,  $150,000.  Repairs  and 
renewals  paid  during  the  year  amounted  to  $25,000  at  New  York,  $30,000 
at  Chicago,  and  $15,000  at  Minneapolis;  interest  on  borrowed  money, 
$15,000.  Subject  to  these  items,  the  profits  of  the  year  amounted  to  $50,000 
at  New  York,  $35,000  at  Chicago,  and  $25,000  at  Minneapolis.  Complete 
the  profit  and  loss  account  for  the  year. 


Accountancy  Problems  and  Solutions. 


Practical  Accounting  Problems. 


/ 


^ 


SohltMNI 

PROFIT   AND   LOSS   ACCOUNT  For 

Accounts  New  York       Chicago      Minneapolis       Total 

To  Depreciation  of  plant $16,500.00      $13,800.00       $9,900.00        $40,200.00 

Partners'  salaries 5,000.00          3,000.00          2,000.00          10,000.00 

Interest  on  capitals: 

6%  on — $350,000.00  15,000.00                                                        15,000.00 

6%  on —    166,666.66  10,000.00                                 10,000.00 

6%  on 8.333-34  5,000.00            5,000.00 

500,000.00 

To  Interest  on  loans: 

50%  on..    $15,000.00  7,500.00                                                          7,500.00 

33-33%  on..      15,000.00  5,000.00                                   5,000.00 

16.67%  on..      15,000.00  3,500.00           3,500.00 

»oo% 

Balance  down $6,000.00       $3,200.00       $5,600.00        $14,800.00 

Being  net  profits.. $50,000.00     $35,000.00     $35,000.00     $110,000.00 

Division  of  Profits. 
To  Chicago  partner: 

Profits,  ^of   $3,200.00  $1,066.67  $1,066.67 

Minneapolis  partner : 

Profits,  Kof  $5,600.00  $1,400.00  1,400.00 

New  York  branch  capi- 
tal. K $2,000.00  711. II  1,400.00  4,111. iz 

Chicago     Branch     capi- 
tal. K 2,000.00  711. II  1,400.00  4,111. IZ 

Minneapolis  Branch  capi- 
tal, >i 3,000.00  711.  II  1,400.00  4,iiz.ii 

$6,000.00       $3,200.00       $5,600.00       $14,800.00 


"■ 


the  Year  Ended  December  31,  1904 


By  profits. 


New  York      Chicago       Minneapolis       Total 
$50,000.00     $35,000.00     $25,000.00     $  1 10,000.  oe 


$50,000.00     $35,000.00     $25,000.00     $110,000.00 


By  net  profits $6,000.00       $3,200.00       $5,600.00       $14,800. 


f'i 


$6,000.00       $3,200.00       $5,600.00       $14,800.00 


i 


Accountancy  Problems  and  Solutions, 


i: 


^l 


ProUem  2. 

(Nbw  York  Eiammatkin,  January.  1906.) 

Frcdericka  Ward  dies  leaving  one  daughter,  Doris,  and  two  sons,  Henry 
and  Arthur,  all  of  age,  surviving  her.  Her  will  directs  that  after  the  dis- 
cliarge  of  all  just  claims  on  her  estate  there  shall  be  placed  In  trust  for 
Fredcricka  Winter,  the  child  of  her  deceased  sister,  $50,000,  the  income  of 
which  is  to  be  used  for  the  child's  support  by  the  guardian  appointed  under 
the  trust,  and  the  principal  to  be  paid  over  to  her  when  she  becomes  of 
age.  The  remainder  of  the  estate  is  to  be  divided  equally  among  the  tes- 
tator's three  children. 

The  estate  consists  of  cash  in  a  trust  company,  $12,500;  bonds  and  mort- 
gages on  real  estate,  $250,000;  registered  municipal  bonds,  $90,000;  house- 
hold furniture  appraised  at  $20,130;  horses  and  carriages  appraised  at 
$3,000;  clothing  appraised  at  $2,000,  and  jewelry  appraised  at  7400. 

One  of  the  aforesaid  mortgages,  $50,000  at  5%,  is  in  arrears  of  interest 
for  one  year,  and  foreclosure  proceedings  are  commenced  by  the  executor, 
with  the  result  that  on  an  immediate  settlement  the  estate  realizes  the 
principal  and  the  interest  so  in  arrears  and  the  trust  fund  is  paid  over  to 
the  guardian  of  Fredericka  Winter.  The  February  and  August  semi- 
annual instalments  of  interest  at  5%  on  the  two  remaining  mortgages  of 
$100,000  each  and  the  January  and  July  interest  on  the  registered  4% 
bonds  are  all  duly  received,  and  the  bonds  are  forthwith  sold  for  $90,190. 
The  executor  then  pays  $30,000  to  Doris,  and  $10,000  each  to  Henry  and 
Walter  respectively,  on  account  of  their  interests.  Doris  takes,  as  a  part 
of  her  legacy,  household  furniture  $5,000,  clothing  $900,  and  all  the  jewelry 
at  the  appraised  valuation.  Each  of  the  sons  takes  as  part  of  his  legacy 
one  of  the  remaining  bonds  and  mortgages.  * 

On  the  sale  of  the  remaining  effects  the  furniture  realizes  $15,000,  the 
clothing  $1,000,  and  the  horses  and  carriages  $3,200.  There  is  also  re- 
ceived from  the  trust  company  for  interest  on  deposit,  $350.  The  executor 
expended  for  probate  $150,  funeral  $600,  monument  $1,000,  tax  on  personal 
estate  $350,  counsel  fees  $1,500,  fire  insurance  $32,  and  sundry  claims 
against  the  estate  $7,201.  The  allowance  for  executor's  fees  was  fixed  by 
the  will  at  $2,500. 

Prepare  a  summary  accounting  showing  the  cash  in  hands  of  executor 
and  the  amount  payable  to  each  of  the  heirs. 

Soliition. 

SUMMARY  ACCOUNTING  STATEMENT  OF  THE  EXECUTOR 

OF  FREDERICKA  WARD. 
I  charge  myself  with 
Amount  of  inventory  of  personal  property,  viz. : 

Cash  in  Trust  Company $12,500.00 

Bonds  and  mortgages  on  real  estate.  250,000.00 
Registered  municipal  bonds 90,000.00 


Practical  Accounting  Problems. 


L 


Household  furniture  20,130.00 

Horses  and  carriages 3,000.00 

Clothing  2,000.00 

Jewelry    7,400.00 

Amount  of  Increase,  viz. : 

Interest  on  bonds  and  mortgages $12,500.00 

Interest  on  municipal  bonds 3,600.00 

Sale  of  municipal  bonds 190.00 

Sale  of  horses  and  carriages 200.00 

Interest  on  deposits  at  Trust  Com- 
pany     350.00 


$3851030.00 


I  credit  myself  with 
Amount  of  testamentary  expenses,  viz. : 

Probate  of  will $150.00 

Funeral  expenses 600.00 

Monument    1,000.00 

Amount  of  miscellaneous  payments,  viz.: 

Taxes  on  personal  estate $350.00 

Counsel  fees   1,500.00 

Fire  insurance    32.00 

Sundry  claims  against  the  estate...  7,201.00 

Amount  of  decreases  in  value  of  assets,  viz. : 

Household  furniture  $130.00 

Qothing  100.00 

Advances  to  legatees  in  cash  and  dis- 
tributed assets,  viz.: 

Doris  Ward $43,300.00 

Cash    $30,000.00 

Qothing    9oaoo 

Furniture  5,000.00 

Jewelry  7»400.oo 

Arthur  Ward  110,000.00 

Cash   $10,000.00 

Bond  and  Mortgage 100,000.00 

Henry  Ward 110,000.00 

Cash  $10,000.00 

Bond  and  Mortgage —  100,000.00 

5 


16340.00 


$401370.00 


$1,750.00 


9.081.00 


230.00 


•npiMa' 


$1: 


Accountancy  Problems  and  Solutions, 


Practical  Accounting  Problems. 


/ 


^ 


ii 


Fredericka  Winter: 
Amount  placed  in  trust 50,000.00 


Total  Credits 


$313,300.00 


$324,363.00 


Balance   $77,507.00 

Cash  Balance  available  for  legatees 2,5oaoo 


$7S»oo7.oo 


STATEMENT  SHOWING  AMOUNTS  DUE 

Total  Value  of  Personal  Property 

Total  Net  Income: 

Increase   $16,840.00 

Less  Decrease  230.00 


BENEFICIARIES. 
$385,030.00 


16,610.00 


Disbursements,  exclusive  of  advances. 


Balance 

Executor's  Commission  

Specific  Bequest  to  Fredericka  Winter. 


$401,640.00 
10,833.00 

$390307.00 


$2,500.00 
50,000.00 


Balance  to  be  equally  distributed 

Doris  Ward  is  entitled  to $112,769.00 

Advances : 

Cash  $30,000.00 

Oothing  900.00 

Furniture   5,000.00 

Jewelry 7,400.00 

43i300.oo 

Balance  due  $69469.00 

Arthur  Ward  is  entitled  to $112,769.00 

Advances : 

Cash   $10,000.00 

Bonds  and  Mortgages 100,000.00 

110,000.00 

Balance  due  2,769.00 

Henry  Ward  is  entitled  to $112,769.00   - 

Advances : 

Cash $10,000.00 

Bonds  and  Mortgages....  100,000.00 

110,000.00 

Balance  due 2,769.00 


52,500.00 
$338,307.00 


• 


Problem  3. 
(New  York  Examination,  January,  1907.) 

A,  B,  C  and  D  enter  into  partnership  with  a  capital  of  $100,000.00. 
A  invests  $40,000.00,  B  $30,000.00,  C  $20,000.00  and  D  $io,o6o.oa  They 
are  to  share  profits  or  losses  in  the  following  proportions :  A  35%,  B  28%, 
C  22%,  and  D  15%.  They  are  also  to  receive  stipulated  salaries  charge- 
able to  the  business.  ~~ 
At  the  end  of  six  months  there  is  a  loss  of  $8,000  and  mealtime  the 
partners  have  drawn  against  prospective  profits  as  follows:  A,  $400;  B, 
$600;  C,  $600,  and  D,  $400. 

They  dissolve  partnership  and  ag^ree  to  distribute  proceeds  of  firm 
assets  monthly  as  realized.  C  and  D  enter  other  business  and  A  and  B 
remain  to  wind  up  the  firm's  affairs,  it  being  stipulated  that  from  all 
moneys  collected  and  paid  over  to  C  and  D  a  commission  of  5%  is  to  be 
deducted  and  divided  equally  between  A  and  B  for  their  services  in  the 
winding  up. 

The  realization  and  liquidation  lasts  four  months  and  the  transactions 
are  as  follows : 

Expenses  and 

Assets  LiabiUties       ^o®!**®" 

realised.       Uquidated.     »«i»ation 

exclusive  of 
commissions. 

First  month    $30,190.00  $7,900.00  $400.00 

Second  month    50,300.00  6,100.00  750.00 

Third  month   20,010.00  3,800.00  34aoo 

Fourth  month  9,500.00  2,2oaoo  iiaoo 

$110,000.00    $20,000.00     $1,600.00 

Prepare  partners'  accounts  showing  the  amount  payable  monthly  to 
each  one. 


$75»oo7.oo 


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Problem  4. 

(Institute  ol  Chartered  Accountante  of  Ontario  (Canada)  at  the 

Filial  May.  1907.  Examination.) 

The  A.  B.  Co..  limited,  wholesale  traders  also  act  as  sales  agents  for 
a  manufacturer. 

From  the  following,  arrange  their  trial  balance  at  tht  31st  of  December, 
1906: 

Capital  Account,  $25,000;  Inventory  Account  (mdse.),  $^7,SOo;  Un- 
claimed Dividends,  $150;  Cash,  $47580;  Commissions,  $^0,341;  GoodwiU. 
$7,500;  General  Expenses,  $2,142.76;  Traveling  ^xpenses,  $2,26o.&t;  Bad 
Debts  Reserve,  $1,250;  Accounts  Payable,  $5,072.38;  Advertising,  $7^; 

Salaries,  $5420;  Purchases,  $49,456.58;  P"^*^^^^^^,^*^"^ t;l^o-^^^^^^^ 
$56,900.17;  Sales  Discounts.  $2,083.98;  Taxes  Account  $287.40.  Balance 
on  credit  p€r  Bank  Pass  Book,  $1,000;  Bills  Payable.  $7.02141;  Accounts 
Receivable  $14,576.15;  Furniture  and  Fixtures,  $1,250;  ^^^^^  BmW- 
ings.  $6,000;  Outstanding  Checks.  $1.397-40 ;  Mortgage  on  Warehouse. 
$3,000;  Inventory  31st  of  December,  1906,  $15,000. 

Prepare  Trading  Account;  and  assuming  the  expenses  to  have  been 
incurred  in  the  same  proportion  that  gross  profits  and  commissions  bear 
to  each  other,  make  out  a  Profit  and  Loss  Statement  showing  the  result 
of  the  trading  and  agency  operations  separately. 

Prepare  a  statement  showing  the  percentage  of  Turnover  and  of 
Commissions  that  the  total  expenses  represent,  respectively. 


id 


Practical  Accounting  Problems. 


Solution. 

TRIAL  BALANCE  OF  THE  A.  B.  COMPANY,  LIMITED, 

DECEMBER  31.  1906. 

Land  and  buildings $6,000.00 

Furniture  and  fixtures 1.250.00 

Inventory    17,500.00 

Accounts   receivable...., 14,576.15 

Bank  balance  as  per  pass  book 1,000.00 

Cash    475.80 

Goodwill   7,500.00 

Capital   account $25,000.00 

Mortgage  on  land  and  buildings 3,000,00 

Bills   payable 7,024.41 

Accounts    payable 5.072.38 

Outstanding    checks 1,397.40 

Unclaimed    dividends isaoo 

Reserve  for  bad  debts 1,250.00 

General  expense 2,142.76 

Traveling  expense. . ; 2,260.84 

Advertising    769.24 

Salaries   5,420.00 

Taxes 287.40 

Commissions    : 10,341.00 

Purchases   49,456.58 

Purchases  discount 587.39 

Sales    56,900.17 

Sales    discount 2,083.98 

N 

$110,722.75     $110,722.75 

STATEMENT  OF  PERCENTAGES. 

Proportion  of  expense  applicanble  to  trading $2,720.06 

Proportion  of  expense  applicable  to  agency 8.160.18 

$10,880.24 
Total  expense  equal  to  19.8485  +  %  of  turnover  amounting  to  $54,816.19 
Total  expense  equal  to  105.2142  -f  %  of  the  commission  amounting  to 
$10,341.00 


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AccoMntaticy  Problems  and  Solutions. 

Ptobkm  5. 

(Illinois  Eiaminatjon.  May.  1907.) 

As  on  January  i,  1890,  a  corporation  is  formed  for  the  purpose  of 
acquiring  and  conducting  a  cemetery,  and  starts  business  on  that  date 
with  a  capital  stock  of  $100,000.00  paid  for  in  cash.  The  company  first 
purchases  forty  acres  of  land  within  easy  access  of  a  large  city,  paying 
for  same  at  the  rate  of  |i/xx)  per  acre.  It  proceeds  to  expend  considerable 
sums  of  money  in  the  purchase  and  planting  of  trees  and  shrubs,  lapng 
out  drives,  and  pathways,  sodding,  building  of  glass  houses,  etc.  The 
policy  of  the  company  is  to  withhold  the  selling  of  burial  lots  until  after 
January  i,  1900,  so  as  to  allow  the  trees  and  shrubs  to  become  more  fully 
grown  and  in  the  expectation  that  with  the  growth  of  the  city  their 
property  will  become  more  valuable.  In  the  year  1900  the  company  com- 
mencci  selling  burial  lots,  and  all  lots  are  sold  under  a  special  provision 
whereby  the  company  agrees  to  apply  fifty  per  cent,  of  all  cash  received 
on  sales  in  the  purchase  of  four  per  cent,  bonds  until  a  total  of  $i50,ooaoo 
of  such  bonds  shall  have  been  so  purchased.  The  agreement  further 
provides  that  after  all  the  lots  have  been  sold  the  company  will  wind 
up  its  affairs  and  the  above  bonds,  amounting  to  $150,000.00,  shall  be 
given  to  the  city,  which  shall  use  the  income  of  such  bonds  for  keeping 
up  the  cemetery.  It  is  the  custom  of  the  company  not  to  purchase  bonds 
until  after  the  close  of  each  fiscal  year,  and  after  the  total  sales  of  that 
year  have  been  determined. 

March,  1905,  the  directors  of  the  company  find  that  while  they  be- 
lieve the  books  to  be  in  balance,  no  proper  entries  have  been  recorded 
showing  the  total  cost  of  their  investment,  and  that  no  entries  haverbeen 
made  with  respect  to  the  fund  of  $150,000.00  from'  which  said  bonds  are 
to  be  purchased.  While  cash  dividends  have  been  declared  and  paid,  the 
directors  are  in  ignorance  of  what  their  profits  actually  have  been,  and 
how  much  of  the  dividends  sp  received  have  been  out  of  their  profits 
and  how  much  in  the  nature  of  liquidating  dividends,  representing  a  return 
of  their  original  investment.  They,  therefore,  employ  a  certified  public 
accountant  to  determine  all  these  matters,  and  to  make  the  necessary 
entries  on  their  books,  and  render  report  to  them.  After  determining  the 
clerical  accuracy  of  the  books  the  accountant  draws  off  the  two  trial 
balances  given  below,  and  frdm  them  prepares  the  necessary  entries  and 
obtains  the  information  required  by  the  directors. 


TRIAL  BALANCE 


Doits  : 


K.eal  Estate.  ,......••.«.••••• 

Improvements • 

Bonds  

Adminstration  Expense 

Upkeep  of  Cemetery. 


Jan.  i|  1900.  Jan.  i,  1905' 

$40,000.00  $40,000.00 

45,000.00       45,000.00 

i25,ooaoo 

20,000.00       46,000.00 

45,000.00 


.\ 


1  ' 


Practical  Accounting  Problems. 


Dividends  paid. 
Cash   


130,000.00 

7,000.00       40,800.00 


$112,000.00    $471,800.00 


Credits  : 

Interest  account  representing  interest  at  4%  on 
unexpended  cash  during  development  period..      $12,000.00 

Bond  interest  account 

Sale  of  lots 

Capital  Stock 100,000.00 


$12,000.00 

9,800.00 

350,000.00 

100,000.00 


$112,000.00    $471,800.00 

An  inventory  of  their  unsold  lots  as  on  January  i,  1905,  shows  that 
they  have  ten  acres  left  unsold  of  equally  desirable  character  with  that 
already  sold.  Draw  up  entries,  prepare  profit  and  loss  account  for  period 
and  balance  sheet  as  on  January  i,  1905,  in  same  manner  as  if  you  had 
been  the  accountant  engaged.  In  any  interest  calculation  use  4  per  cent, 
simple  interest. 


Solution* 

JOURNAL  ENTRIES : 

Operating   $382,500.00 

To  Real  Estate 

Improvements   

Upkeep  Expense 

Gross  profit  (down) 

Sales  of  lots... 350,000.00 

Real  Estate    (Inventory) 32,500.00 

To  Operating  

Gross  profit  252,500.00 

To  Administrative  Expense 

Business  profit  (down) 

Business  profit   206,500.00 

Interest    12,000.00 

Bond   Interest   (Rec.) 9,800.00 

To  net  profit  (down) 

Net  profit  228,300.00 

To  Sinking  Fund  Reserve 

Sinking  Fund  Reserve 

Surplus  (down)    

Surplus  78,300.00 

Deficit 51,700.00 

To  Dividend    


$40,000.00 
45,000.00 
45,000.00 

252,500.00 


382,500.00 

46,ooaoo 
206,500.00 


228,300100 

i2aooo.oo 
30,000.00 
78,3oaoo 


$i3o,ooaoo 


14 


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Accountancy  Problems  and  Solutions. 


Practical  Accounting  Problems. 


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Accountancy  Problems  and  Solutions. 

Problem  6. 

(Illinois  Eiamination.  December,  1907.) 

At  the  close  of  the  first  year,  after  engaging  in  business,  the  ledger 
balances  of  an  Illinois  Fire  Insurance  Company  may  be  assumed  to  be 
correctly  as  follows : 


LoBses  adjusted  and  paid $16,785.90 

Losses  adjusted,  not  paid 5,210.85 

Premiums  in  hands  01  agents 7,892.54 

Capital 

Surplus 

Premiums 

Interest 

Commissions 26,847.25 

Taxes 1,510.83 

Salaries. 7,428.10 

General  Expenses 16,582.72 

Investments  and  Loans 290.150.69 

Office  Furniture 2,495.10 

Stationery  Sc  Supplies  (Inventory) 1,828.90 

Accounts  ReceivaDle 16,825.95 

Accounts  Payable 

Reserve  for  losses  adjusted 

Organization  Expenses 1,822.03 

Cash 19,453.24 


$200,000.00 

100,000.00 

97,500.00 

8,942.50 


3.180.75 
5,210.85 


$414,834.10     $414,834.10 


The  Policy  register  shows: 

Policies 
Issued 

Expiring  in  i  year $1,300,000.00 

Expiring  in  2  years 1,075,000.00 

Expiring  in  3  years 1,450,000.00 

Expiring  in  5  years 1,250,000.00 


Premiums 
Received 

$15,000.00 
18,500.00 
34,500.00 
29,500.00 


$5,075,000.00         $97,500.00 


The  Illinois  Statute  reads: 


**In  estimating  profits  there  shall  be  reserved  therefrom  a  sum  equal 
to  the  whole  amount  of  unearned  premiums  or  expired  risks,  and  policies. 
The  company  may  declare  dividends  not  exceeding  ten  per  cent  of  its 
capital  stock  in  any  one  year  that  shall  have  accumulated  and  be  in 
possession  of  a  fund  in  addition  to  the  amount  of  its  capital  stock,  and 
of  such  dividends  and  all  actual  outstanding  liabilities  equal  to  one-half 
of  the  amount  of  all  premiums  on  risks  not  terminated  at  the  time  of  mak- 
ing such  dividend.    A  year  is  defined  to  mean  a  calendar  year." 

Determine  the  reserve  required,  and  state  what  sum,  if  any  is  avail- 
able for  dividends  without  impairing  the  surplus  shown  in  the  ledger 
balances.  Changes  in  relation  to  policies  cancelled  or  settled  for  under 
claimed  for  losses  may  be  ignored. 


Practical  Accounting  Problems. 


Solution. 


Policies 

Policies  in       Premiums 

Not 

Expire  in         issued 

force  end  of      Received     Earned 
year 

Earned 

I  year. . .  $1,300,000.00 

None            $15,000.00  $15,000.00 

None 

2     **    ...     1,075,000.00 

^537.5oo-«>o     18,500.00       9,250.00 

$9,250.00 

3     **    . . .     1,450,000.00 

966,666.67     34,500.00     11,500.00 

23,000  00 

5     "...      1,250,000.00 

1,000,000.00     29,500.00       5,900.00 

23,600.00 

l5'07S.ooo-oo 

$2,504,166.67  $97,500.00  $41,650.00 

$55-850.00 

In  arranging  above  I  have  assumed  that  all  policies  had  run  one  year. 
This  is  not  very  probable  in  actual  affairs  but  it  may  be  taken  as  a  basis 
for  solution. 


MEMORANDUM  AS  TO   DIVIDENDS 
(As  per  provision  of  Illinois  law) 

Unearned  Premiums $55,850.00 

Deduct:  Required  Reserve  50% 27,925.00 

Available  portion  of  above $27,925.00 

Deduct:  For  current  deficit $3,598.43 

For  reserve  for  losses 5,210.85 

Accounts  Payable 3,180.75     11,990.03 

Dividend  which  may  be  declared  as  against  one  half  of  un- 
earned premiums 15,934.97 

Which  is  .07967485%  of  Capital  Stock 


I 


I ' 


Accountancy  Problems  and  Solutions. 


Practical  Accounting  Problems. 


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Problem  7. 

(New  York  Examination,  February,  1908.) 

A  corporation  was  formed  with  a  capital  stock  of  $500,000.00  (of  which 
$200,000  is  preferred  and  $300,000  is  common  stock),  to  acquire  and 
consolidate  three  existing  corporations  designated  as  A.,  B.,  and  C,  and 
having  the  following  status  respectively : 

Book  Accounts.  Liabilities.  Surplus.  Deficit.                 Capital. 

A $171,000  $56,000  $15,000  $100,000 

B 165,000  80,000  $5,000  90,000 

C 108,000  47,000  6,0000  55,000 

$444,000  $183,000  $21,000  $5,000  $245,000 

The  several  vendor  companies  contract  with  the  promoter  to  sell  their 
assets,  excluding  cash  funds,  as  above  stated  and  including  goodwill,  at 
the  following  prices  respectively,  viz.:  A.,  $125^000;  B.,  $100,000;  C, 
$75,000,  payable  one-half  in  cash  and  one-half  in  preferred  stock  to  be 
issued,  therefor,  by  the  new  company,  which  is  also  to  assume  all  out- 
standing obligations. 

The  promoter  or  vendor  contracts  with  the  new,  or  vendee  company  to 
acquire  the  several  properties  subject  to  the  liabilities  as  stated  and  to 
provide  an  additional  working  capital  of  $100,000.00  cash,  and  to  take  in 
payment  therefor  the  entire  authorized  stock  of  the  new  company,  out  of 
which  the  subscribing  incorporators  and  directors  will  acquire  their  stock 
by  purchase  from  the  underwriters. 

The  common  stock  is  undewritten  by  bankers  at  80  per  cent,  with 
bonus  of  one  share  of  preferred  to  each  ten  shares  of  common  stock. 
The  bankers  are  also  to  take  an  additional  $10,000  of  preferred  stock  at 
par,  as  part  of  their  agreement. 

(a)  Frame  opening  entries  and  balance  sheet  of  the  vendee  company, 
showing  the  costs  respecitvely  of  assets,  goodwill  and  organization 
expense  on  the  assumption,  that  the  terms  of  the  several  contracts,  are 
known  to  all  the  parties  concerned  and  form  the  basis  of  the  financial 
values  established. 

(6)  Frame  closing  entries  of  "A"  company,  showing  cancellation  of 
stock  and  distribution  of  proceeds  of  sale  among  stockholders. 

(c)  Show  promoter's  compensation  or  profit  for  effecting  the  consoli- 
dation. 


23 


Accountancy  Problems  and  Solutions. 

Solution. 

^^)  THE CORPORATION 

INCOMPOIATID  UNDER  THE  LAWS  OF  THE 

State  of  New  York  with  an 
AUTHORIZED  CAPITAL 

OF 

$500,000.00, 

DIVIDED  INTO  2,000  SHARES  PREFERRED 

AND  3,000  SHARES  COMMON  STOCK, 

FAR  VALUE  $100  EACH. 

Cash    $ioopoo.oo 

working  capital  provided  by  the  promoter,  as 
per  agreement. 

Plant  ANo  SuN»Rv  Ass^s  $444.ooo.oo 

acquired  from: 

Co.  A $171,000.00 

£0   B    _ 165,000.00 

Co.  C. 108,000.00 

Bonus— Organization  Expense  $100,000.00 

being  organization  expenses  allowed  promoter 

as  follows: 
For    underwriting    common    stock 

20%   of  $300,000......;... $60,000 

300  shares  preferred  stock  @  $100. .  30,000 
promoter's  compensation  100  shares 

preferred  stock  @  $100 10,000 

_  $  39,000.00 

Goodwill :  — ;  v f  ai« 

representing  excess  payments  for  plants 

acquired,  viz. : 

Co.  A $10,000.00 

Co.  B 15.000.00 

Co.  C 14,000.00 

To  Sundry  Liabilities 

assumed  by  this  Co.,  viz.: 

Co.  A $56,000.00 

Co.  B 80,000.00 

Co.   C 47,000.00 

To  Capital  Stock 

2,000  shares  of  preferred   stock  3,000  shares 
of  common  stock  par  value  of  each  $100.00. 

24 


$183,000.00 


$500,000.00 


Practical  Accounting  Problems. 
BALANCE  SHEET  OF  THE CO..  AS  ON 


Assets 

Sf^^;  "'J'a"\' $100,000 

Plant  and  Sundry  assets...    444,000 

^^^w^" 39.000 

100,000 

$683,000 


Organization  expenses. . 


Liabilities 

Sundry  liabilities fig. 

Capital  stock:  '*' 

Preferred  stock...  $200,000 
Common  stock...    300,000    500, 


000 


000 


$62,500.00 


(b)  Goodwill    * 

To  Surplus  '''':':::::::::::::::::::::::::^''''^'^ 

being  the  amount  in  excess  of  book  values 

from  sale  of  business  to  promoter 

Sundry  Liabilities   ^  ^^ 

Promoter  ....  $56,000.00 

To  Assei;* ;::;:::;::;:;:;;;;;;;;;;;;;;;;  "^'*^~ 

Goodwill    

To  close  above  accountson  thebi^ks 'and 
charge  promoter  with  selling  price. 

Preferred   Stock    

(of  vendee  Co.,  at  par) 
Cash    ^ 

To  Promoter";;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;*  ^'500.00 

To  record  settlement  as  made  by  promoter* in 

accordance  with  agreement. 

Surplus    * 

^  ^  $  2S,ooaoo 

Capital  Stock   . 

T^  Tj    r       *  «  '  *. 100,000.00 

To  Preferred  Stock  

Cash   

To  close  all  accounts  on'bookVof  this  Ca'and 
distribute  preferred  shares  of  the  vendee  Co. 
aud  the  cash  to  the  stockholders  of  this  Co. 
Cc}  Transactions  of  promoter,  assuming  that  they 
are  all  recorded  as  and  when  made  or  con- 
tracted for: 

Sundry  Assets  * 

Goodwill    $444,000.00 

To  Sundry  Liabilities"  Assumed;.;;;;;;;:    ^^'"^'"^ 

Co.  A.  (Purchasing  Price) ;;; 

Co.  B.   (Purchasing  Price) ;;;; 

Co.  C.   (Purchasing  Price) 
showing  the  assets  and  liabilities  bargained 

with  his  liability  as  recorded  in  favor  of  the 
three  Companies  respectively;  (he  has  not 
the  cash  with  which  to  pay  them  until  he  has 

2$ 


$683,000 


$10,000.00 


$171,000.00 
10,000.00 


$125,000.00 


$  62,500.00 
62,500.00 


$183,000.00 
125,000.00 

100,000.00 

75,000.00 


'f 


Accountancy  Problems  and  Solutions. 

A.A  in  fretting  the  shares  of  the  vendee 
'Z^^  u"„fe"aten  as  stated  in  the 
question. )  $300,000.00 

^S  trra'ss;.  of  W  companies- A..  B 
!^d  C.  transferred  by  the  Promoter  to  the 
„ew  or  vendee  Co.,  »483,ooo  less  $183,000.    ^^^^^^ 

Liabilities    •  ■ .  •  •  •■■■■_■■  „/  ^^^^    various 

to    close   out   the    accounts  ot    tn 
liabilities  assumed  from  Companies  A.,  «.. 
and  C,  respectively,  as  per  entry  1  above  1444,000.00 

To  Sundry  Assets  39,000.00 

Issets  taken  over  from  Company  A^^ 
B.,  and  C.  respectively,  as  per  entry 

above.  $200,000.00 

Preferred  Stock    300,000.00 

Common        "       "..  $400,000.00 

To  Vendee  Company  100,000.00 

Profit  and  Loss I  "  "t  "   ''aII    Co 

For  entire  capital  stock  of  vendee  Co. 
For  ^""^^.'^J^^  ,  over  to  promoter  as  per 
($5oo,ooo.c«),tm^ne^^^  ^"^  '^'^ 
agreement,  showmg  creau  if  ^^^  for 
for  gross  amount  allowed  the  promoter  10 
effecting  the  consolidation.  $10,000.00 

Cash   ; $10,000.00 

To  Preferred  Stoc^  ^ -^  •-•  •  - '  —  ^^^^  ^^ 
for  sale  to  the  bankers  Dy  mc  y 
100  shares  preferred  stock  at  par,  as  per 
agreement  of  underwntmg.  $240,000.00 

Cash    90,000.00 

Profit  and  Loss  $300,000.00 

To  Common  Stock 30,000.00 

for  r^lftol  balersof  theentirecommon 
'Zf@l>%.  difference  being  co|t<,f  under- 
pin.; with  addit^nal  bonus  of  ,  sha^o^ 
preferred  stock  to  each  10  snares  u 

stock.  $100,000.00 

Vendee   Company    ''.'.'.'.'.*'.'.'.". $100,000.00 

To   Cash    •  '''^nv    of    the 

full.  26 


Practical  Accounting  Problems. 


t 


Dr.  PROMOTER'S  PROFIT  AND  LOSS  ACCOUNT.  Cm. 


To  expenses  borne  in  ef- 
fecting consolidation  as 
follows: 

Bankers  charges  for  un- 
derwriting        common 

^^^' ■'-; $90,000 

Ifalance  (carried  down)      10,000 
being  net  profit  for  ser- 
vices rendered. 


|ioo,ooo 


By  gross  allowance  by 
Vendee  Company  for 
the  preliminary  costs  of 
consolidation  of  the 
various  companies  into 
the  Vendee  Company. . .  $100,000 


$100,000 
Sa^nce Sio.ooo 


The  final  accounts  of  the  promoter  are : 

100  shares  vendee  Co/s  preferred  stock 

@  par  value $10,000.00; 

this     being     his     net     profit     as     per 

profit  and  loss  account 


$10,000.00 


27 


Accountancy  Problems  and  Solutions. 
Problem  8. 


Practical  Accounting  Problems. 


(New  York  Eiamination.  February.  1908.) 

A,  the  senior  partner  of  a  firm,  dies  May  9,  at  the  close  of  which  day 
the  trial  balance  of  the  copartnership  ledger  shows  the  following  items: 

^^sh   $3,794 

Fixed   assets 21^36 

Trade  debtors 92,766 

Trade  creditors $93f2o6 

Inventory,  January  i 12,005 

Purchases 14.160 

Sales i9^55g 

Expenses 5^13 

Capital,  A 20,000 

Capital.  B io,ooo 

Capital,  C 5^000 

Personal,  A 2,310 

Personal,  B ^50 

Personal,  C 450 

$150,174    $150,174 


The  inventory  of  mdse.  stock  May  9,  is  computed  at  $15,200,  the  unex- 
pired insurance  at  $149,  and  accrued  expenses  at  $207.  The  division  of 
profits  between  partners  is  as  follows:  A,  fifty-seven  per  cent;  B, 
twenty-eight  per  cent;  C,  fifteen  per  cent  No  interest  is  credited  on 
capital,  but  interest  is  credited  on  A,  personal  $115,  and  charged  to  B, 
personal  $6.25,  and  to  C,  personal  $3.75. 

The  partnership  agreement  provides  in  case  of  A's  death  for  the  sale 
of  A's  interest  to  B  and  C  on  the  execution  of  a  bond  by  them  in  favor  of 
A's  estate,  payable  in  five  yearly  installments,  and  stipulates  that  the 
assets  are  to  be  taken  at  book  value,  excepting  one-half  per  cent,  reserve 
lor  bad  debts,  in  compliance  with  which  provision  a  reserve  of  $500  is 
made. 

A  new  firm  of  B,  C,  and  D  is  formed,  in  which  D  invests  $S,ooo  cash 
for  a  one-fourth  interest  in  the  business.  B  withdraws  all  in  excess  of 
$10,000  and  C  pays  in  a  sum  sufficient  to  bring  his  capital  up  to  $5,000.  The 
future  profits  are  to  be  shared  in  the  following  stated  proportions,  vis.: 
B  one-half.  C  one-fourth  and  D  one-fourth.  The  new  firm  executes  a 
purchase  mortgage  with  bond  as  provided  in  favor  of  A's  estate  for 
$30,000.  and  pays  over  balance  of  his  interest  in  cash. 

Prepare  the  necessary  accounts  to  give  expression  to  the  foregoing 
Kquidation  of  the  firm  of  A,  B  and  C,  and  a  balance  sheet  of  the  firm  of 
B,  C  and  D,  as  at  the  beginning  of  their  enterprise 


Solution. 

LIQUIDATION  OF  THE  FIRM  OF  A.  B  AND  C 

May  9,  1907. 

Trading  Account 


To  inventory  Jan.  i. .  $12,005.00 
Purchases 14,160. 00 

36,165.00 
l^ss:       inventory 
May  9 15,200.00 

Cost  of  mdse.  sold    10,965 .  00 
Profit     and    loss, 
gross  profit 8,693 .  00 

$19,658.00 


%  sales $19,658.00 


$i9.6s«  00 


To  Partner  A 


Interest 


$115.00 


M 

i 


By  Partner  B.. 

Partner  C 

Profit  and  loss. 


$6.35 

3  75 
105 . 00 


$iiS 


00 


_  Profit  and  Loss 

lo  Expenses....  tr  »r>,  ^^           r^     «, 

ExJ^nses  accrued:  ^lof  00           ^y  trading     account 

Interest ill' la  -.gross  profit $8,693.00 

Reserve    for    bad  ^                        Unexpired    insur-          ^ 

Net  profit  carried 
^°"^ard -  2.817.00 

$8,842.00  ^.^  *a  o 

—  90,842  oc 


A 


29 


Ill IIIIUMP IIIIIIIM^^^^ 

t 


III IBlPimml 


^ 


Accountancy  Problems  and  Solutions. 


To  balance. • .    f  S.ooo  oo  By  capital,  firm  A,  B 

and  C $4.96*>  oo 

Cash  invested 31  20 

$5,000.00  $5,000  00 

Balance $5,00000 

Partner  D. 

By  cash  invested $5,000  00 

Cash  Account. 

To  balance,  firm  A,  B  By  B ,  withdrawal. ...           3251 

and  C $3,794  00  Estate  of  A 4.030  69 

C,    additional    in-  Balance 4,762  00 

vestment 31.20 

D, investment.  ..  .  5,000.00 

$8,825.20  $8,825.20 

To  balance  $4f76*  00 

Firm  op  B,  C  and  D. 
Balance  Sheet. 
May  10,  1907. 
Assets  :  Liabilities  : 

Cash   t4f762  .00  Accounts  payable. . .  .  $93,200  .00 

Accounts  receivable  Accrued  expenses 207  .00 

Receivable.  $92,766  Bond  and  mortgage. 

Less:  Reserve  payable  to  estate  of 

for  bad  debts        500    92,266  .00  Am  five  yearly  m- 

Merchandise..  15,200.00  stallments 20,00000 

Unexpired  in-  Capital: 

surance ....  1 49 . 00  Partner  B . .  $ 1 0,000 

Fixed  assets..  21,036.00  Partner  C.      5,000 

Partner  D..      5,000 

20,000  00 

$133,413  00  $133,413  00 


Practical  Accounting  Problems. 


To  profits  allocated  to 
partners,  thus: 
A  57  per  cent.  .. .    $1,605.69 

B  28  per  cent 788.76 

C  15  per  cent 422.55 

$2,817  00 


By  net  profit  brought 

forward $2,817  00 


$2,817  00 


Partner  A. 


To  balance $24,030 .69 


$24,030.69 


By  investment $20,000  .00 

Personal  account 2,3 10  .  00 

Interest 1 1 5  .00 

Net    profits,    57    per 
cent 1,605.69 

$24,030.69 


By  balance $24,030  .69 


Partner  B. 

To  personal  account .  .       $ 7  50 .  00 

Interest 62c 

Balance $10,032:51 


$10,788.76 


By  investment $10,000  .00 

Net  profits,  28  per 

cent 788  76 

$10,788.76 


Balance $10,032  51 


Partner  C. 


To  personal  account. . 

Interest 

Balance 


$450.00 

3-75 
4,968.80 

$5,422.55 


By  investment $5,000  00 

Net  profits,  15  per 

cent 422.55 

$5,422.55 


Balance $4,968  80 


Affairs  op  B,  C  and  D. 
Partner  B. 


To  cash  withdrawn. . 
Balance 


*      $32  51 
$10,000.00 

$10,032.51 


By  capiatl,  firm  A,  B 

and  C $10,032  .51 

$10,032.51 


Balance $10,000  .00 


30 


31 


I 


Accountancy  Problems  and  Solutions. 
Problem  9. 

(New  York  Examination.  February.  1908.) 

The  bookkeeper  of  a  manufacturing  concern  could  produce  only  the 
following  statement  from  its  records  on  January  ist,  1907. 

Manufacturing  expenses $4,622 .89 

Capital  stock 10,000 .  00 

Plant  and  equipment 17,500.00 

Cash 832 . 14 

Gross  sales 8,469 .  10 

First  mortgage  bonds  (due  Dec.  31,  1907) 15,000 .  00 

Materials  and  supplies  (inventory) 4,289 .  34 

Notes  payable 5,000 .  00 

Accounts  receivable 51423 .  23 

Accounts  payable 2,436 .  28 

Interest  on  bonds  (7  months) 393 .  75 

Interest  on  notes  and  accounts  payable 282 .  40 


On  January  ist,  1907,  the  management  is  changed,  and  you  are  later 
retained  as  a  public  accountant  to  conduct  an  examination  and  prepare  a 
balance  sheet  as  of  January  ist,  1908. 

You  find  that  during  the  preceding  year  the  directors  have  subscribed 
in  cash  to  $7i500  additional  capital  stock,  and  have  retired  all  the  notes 
and  old  accounts  payable  and  that  no  interest  was  paid  on  these  accounts 
for  the  year.  You  also  find  that  the  plant  and  equipment  was  revalued  at 
$15,000,  and  5%  of  this  amount  was  charged  off  to  provide  for  depreciation, 
while  an  additonal  2j4%  was  ordered  placed  in  Reserve  Account  to  cover 
repairs  and  renewals,  the  entire  7^/2%  being  charged  direct  to  Profit  and 
Loss.  The  bonds  outstanding  fell  due  on  December  31st,  1907.  and  were 
paid,  principal  and  interest,  in  cash.  An  inventory  of  materials  and  sup- 
plies places  their  value  at  $2,328.19,  the  practice  being  to  charge  all  pur- 
chases direct  to  Manufacturing  Expenses  and  to  credit  back  the  amount 
of  the  inventory. 

The  accounts  payable  (all  for  material  and  non-interest  bearing)  amount 
to  $546.28. 

Of  the  accounts  receivable,  January  ist,  1907,  $4,968.18  was  collected 
and  the  balance  charged  of!  as  uncollectible. 

In  addition  to  the  material  used  from  stock  during  the  year,  and  the 
amount  still  due  for  material  purchased,  the  manufacturing  expenses  were 
$3,720.52,  all  paid  in  cash,  the  total  manufacturing  expenses  being  31% 
of  the  gross  sales  for  the  year  ending  January  ist,  1908. 

Of  these  91.3%  were  collected  in  cash,  and  the  balance,  all  of  which  is 
considered  good,  remains  on  the  books  in  accounts  receivable. 

Produce  a  comparative  balance  sheet  of  January  i,  1908-1907,  and  state 
tlic  amount  of  gross  sales  for  the  year. 

92 


Practical  Accounting  Problems, 


SolutioiL 


CASH,  1906 
Rbcbipts  Expenditurbs 

^"S^I^^  «^^  .  Plant    and    Equip- 

Gros"  Sk^ «8  .fin  ,«  «'°.ooo°o       ^  ment $17,500.00 

nlS^f^'  ••■•:•  •8.469 .  10                             Deduct: 

Deduct  %  received.  5.423 .  23       3.045  •  87            Bonds  issued.. .. .    15.000.00     $2,500.00 

Mfg.  labor. 4.6aa.89 

Mfg.  purchases $12,527.12 

Deduct 

%pay..  $2,436.28 
Notes 
pay..    5,000.00        7,436.28        5,090.84 

^^^^^^  Balance  on  Hand 832 .  14 

^'3.045.87  $13,045.87 


MANUFACTURING  EXPENSE  ACCOUNT.  1906. 

^^DedSlft-' $".527.12       Cost  of  Manufacturing  carried 

Dec.  31.  inventory. 4.389.34  to  trading  account l",86o.67 

Materials  used $8,237.78 

^^^ 4.622.89 

$12,860.67  $12,860.76 


Cost  of  goods  manufactured . 


TRADING  ACCOUNT,  1906 

.$12,860.67        Sales $8,469.10 

Gross  loss  carried  to  profit  and 
^^^^^^^  lossaccount 4,391.57 


$12,860.67 


$12,860.67 


Gross  loss 


PROFIT  AND  LOSS,  1906 


InterestonbcindsCaccroedy.'""      *ioVil        ^^L}^,''^^^^   *°   deficieijcy 
Interest  on  notes  and  S™,;;;         ^^^ "  ^^  account $5.067 . 


payable. 


72 


282.40 


$5,067.72 


$5,067.72 


1906 
Dec.  31,  net  loss. 


DEFICIENCY  ACCOUNT.  1906 


1907 


$5.067.72   Dec.  31.  surplus  accounts $5,067. 


72 


33 


....-i 


^-api 


W 


I; 


Accountancy  Problems  and  Solutions, 


CASH.  1907 

jijly  , Balance  tSja .  14       Accounts  payable Ia.436  ■  a» 

(^pifcalitockto»^ "J'Soo.oo       Manufacturing  expense. Hoo'to 

AccoiiiiteiecelvaMe 4.968.18       Notespayable. ^'X'^o 

*^*.M*t»i-  Interest  (on notes) 38a. 40 

Salm tao.090.16  Bonds  payable '5'°?S?c 

Dedi»ct,%!receiv.  ■      1.747-84        i8.34a.3a  ^"**b?l^^°^'Hand. '.  *. '. '. ". '.      4.13469 

Betngroi.3%   col-  Sti  i6a  64 

lected I31.164.64  131,104.04 


MANUFACTURING  EXPENSE  ACCOUNT,  1907 

Material  on  hand f4.a89.34       ^oat  of  manufactt™  16  «7  91 

Material  purchased 5.446.  a8  to  trading  account *^'"^-^' 

•4.83s -fi* 

Deduct: 
Inventory  Dec.  31, 1907 1,388.19 

Material  used. . . |a,so7  -43 

Labor 3.7ao.sg  

«6.aa7.95  $6,997.9$ 


TRADING  ACCOUNT,  1907 


Cost  of  goods  maiiiilactiMcd S6.a37.9S       Sales 

i  Being  i^ 
Gross   profit   carried   to   profit  '  3i 

and  loss 113,863.31 

130,090.16 


6a37.95 


$30,090.16 


lao,o9o.i6 


PROFIT  AND  LOSS,  1907 

Plant  revaluation f  a.soo .  00       Gross  profit  on  trading . 

Kw  percent,  written  off 750 .  00 

Ifiirettment  on  bonds. 075  -oo 

Business  profit  carried  down  . . .  9.937  ai 

$13,863.31 


li3.86a   21 


li3,86a.ax 


DISTRIBUTION  SECTION,  1907 


a  %  per  cent,  reserve  for  plant. . . 

B«d  debts 

Balance  to  surplus  account 


•375.00 

455.0$ 

9,107.16 

$9,937.31 


SURPLUS.  1907 


Net  business  profit $9,93721 


$9,937.31 


Dec.  31.  deficiency  account $5.067 .  7* 

Balance 4.039.44 

$9,107.16 


Dec.  3 <.n«t profit $9,107.16 


1908 
Jan.  1  — Balance. 


$9,107.16 


$4,039.44 


3^ 


Practical  Accounting  Problems. 


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Accountancy  Problems  and  Solutions. 


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Problem  10. 
(New  York  Examination.  February,  1908.) 

On  July  9th,  1907,  Smash,  Slump  &  Co.,  bankers,  buy  from  the  Atlantic 
Bridge  Company  its  first  5%  50-year  gold  bonds  dated  July  ist,  1907.  in- 
terest payable  semi-annually,  amounting  to  $10,000,000.00  at  90%  *nd 
interest  with  a  bonus  of  50%  in  common  stock  of  the  Atlantic  Bridge 
Company. 

On  the  same  date  the  bankers  form  a  syndicate  for  one  year  to  take 
the  bonds  at  92^%  and  interest,  with  the  common  stock  as  a  bonus.  They 
make  no  charge  for  expenses.    The  syndicate  is  formed  as  follows: 

Jones  &  Co.  take  $1,750,000.00  as  a  participation. 

Smith  Brothers  take  $6,000,000.00  as  a  participation. 

Rieders  &  Co.  take  $1,250,000.00  as  a  participation. 

Smash,  Slump  &  Co.  take  $1,000,000.00  as  a  participation. 

On  the  same  date  the  bankers  pay  the  Atlantic  Ocean  Bridge  Company 
the  total  amount  due  it  for  the  $10,000,000.00  of  bonds,  and  carry  the  syndi- 
cate, the  members  of  which  make  no  payments  to  the  bankers. 

On  February  ist,  1908,  $6,000,000.00  of  bonds  are  sold  on  the  Stock 
Exchange  at  an  average  price  of  95%  less  }i%  commission. 

On  April  ist,  1908,  $1,000,000.00  of  bonds  are  sold  on  the  Stock  Ex- 
cfaaoge  at  an  average  price  of  94%  less  %%  commission. 

Prepare  statements  as  follows,  showing  the  bankers*  and  participants' 
accounts  as  they  should  appear  on  the  bankers*  books  at  the  close  of  the 

syndicate. 

(fl)  Statement  showing  bankers'  account  for  the  purchase  of  the  secur- 
ities, including  transfers  to  syndicate  account  and  profit  thereon. 

(b)  Statement  of  each  of  the  syndicate's  members'  accounts  as  they 
should  appear  on  the  books  of  the  bankers,  July  9th,  1908. 

(c)  Statement  showing  the  transactions  and  profit  and  loss  on  the 
banker's  own  participation  account,  assuming  that  the  bonds  are  selling 
at  92^%. 

In  makmg  up  the  statements  no  account  need  be  taken  of  the  coupons 
paid  by  the  Atlantic  Ocean  Bridge  Company,  nor,  of  any  interest  charges 
hy  the  bankers  to  the  participants'  accounts  or  to  its  own  participation 
account,  as  it  may  be  assumed  that  the  cash  received  for  the  coupons  by 
the  bankers  will  be  sufficient  to  reimburse  them  for  their  advances  to 
Jufy  9th.  1908. 


Practical  Accounting  Problems. 


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37 


OR. 


Date 


1007 

Jwiy  9 

1908 
July  9 


BOND  INTEREST 


Explanation 


Par  Value 


Accrued. , , 

Transfer    to     profit 
and  loss  account . 


fio.ooo.ooo.oo 


Mos. 


Days 


Amount 


2908 
July  9iBrought  down 


1123.39 
S62,S36 .  99 


$3,000,000.00 


9 


$362,660.38 


:m^°oT•?Lrrr•'^=v:'°^^^^»^d^'^^^ 


36  99 


them  for  their  advances. 


the  cash 


STATEMENT  "  B  "  Participants' 


'Wk^.  JJL. — 


1007 
July  9 

1908 

April  I 

July  9 


Bonds 

Par  Valua 


Bought 
@  -935 


f^SS?l   Total  Debit 


Debit  Balance 


11.6x8,771.58 


$633,584.08 


•458^303.83 


X907 
July  9 
1908 
April  I 

July  9 


16,000,000.00 


S5.550.ooo.  00 


$73- 97 


115.550,073.971    S5.550,073.97 

ta.134.573  97 
$'.571.333.97 


lfo7 
inly  9 

1908 
April  I 

My  9 


$1,350,000.00 


$1,156,350.00  $15.41 


I 


$1,156,265.41 


$'.156,365.41 
$444,703.91 


•337.359 -16 


JONES  ft  CX>. 


S.000.000  COMMON  STOCK  (BONUS)  OP  THE  ATLANTIC 


$875 


000.00 


SMITH  BROTHERS 


$3,000,000.00 


ACCOUNT* 

1 : _ 

CR. 

Date 

Explanation 

Par  Value 

Mos. 

Days 

Amount 

1907 
July  9 

Jones  &  Company. . . . 
Smith  Bros 

$ii7So.ooo-oo 
6,000,000.00 
1,350,000.00 

1,000,000.00 
10,000,000.00 
6,000,000.00 
1,000,000.00 
3,000,000.00 

3,000,000.00 

6 

I 

3 
6 

9 
9 
9 

9 
9 

$21.58 
73-97 
15  41 

".33 
350,000.00 

35,000.00 

13,500.00 

75,000.00 

36.99 

1908 
Jan.    I 
Feb.   I 
Apr.   I 
July   I 
July  9 

Rieder  &  Company.... 
Smash,  Slump  & 
Comoanv 

CouDons 

Accrued  (sold) 

Accrued  (sold) 

Coupons 

Accrued     (carried 
down) 

$363,660.38 

received  for  the  coupons  by  the  bankers  will  be  sufficient  to  reimburse 


Accounts  as  they  should  appear  on  books  of  Bankers,  July  9,  1908. 
JONES  AND  COMPANY 


Date 


1908 
Feb.  1 

April  I 


Bonds 
Par  Value 


$1,050,000.00 
175.000.00 


Sold® 


95 
94 


Gross 


$997,500 
164,500.00 


Less  Com. 


$1,313.50 
318.75 


Net  Proceeds 


$996,187.50 
164.381. 35 


Par  Value 
Bonds  Unsold 


$700,000 .  00 
535,000.00 


Debit  Balance 
Carried  Down 


$6223$4.08 
458,302.83 


Total 


$x.6i8,77i.s8 
633.584.08 


SMITH  BROTHERS 


1908 
Feb.  1 


April  I 


$3,600,000 .  00 
600,000.00 


95 
94 


$3,430,000 .  00 
564,000.00 


$4,500 .  00 
750.00 


$3,415,500.00 
563,350.00 


$3,400.000 .  00 
1,800,000.00 


$2.134373.97 
1.571,323.97 


$5,550,073-97 
S.I34.S7J.9T 


RIEDER  &  COMPANY 


1908 
Feb.  1 

April  I 


$750,000.00 
135,000.00 


95 
94 


$712,500.00 
1x7,500.00 


$937.50 
156.35 


$7x1,563.50 
"7,343.75 


$500,000 .  00 
375,000.00 


$444,702.91 
327  359.16 


$z.x56.  •65.41 
444.70a.  91 


SMASH.  SLUMP  AND  COMPANY 

Date 

Bonds 
Par  Value 

Sold® 

Gross 

Less  Com. 

Net  Proceeds 

Par  Value 
Bonds  Unsold 

Debit  Balance 
Carried  Down 

l^ital 

1908 
Feb.  z 

April  z 

$600,000.00 
xoo,ooo.oo 

95 
94 

$570,000.00 
94,000.00 

$750.00 
135.00 

$569,350.00 
93.875.00 

$400,000 .  00 
300.000.00 

$355,762.33 
261,887.33 

$935.0" -33 
355.763.  S3 

OCEAN  BRIDGE  CO..  shared  as  follows  among  sjmdicate  members: 


RIEDER  &  CO. 


$635,000.00 


SMASH.  SLUMP  &  CO. 


$500,000.00 


39 


Accountancy  Problems  and  Solutions. 


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nterest — coupons 

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Practical  Accounting  Problems. 

STATEMENT  "C"-Showing  Banker's  Own  Participation  Account 
with  Inventory  at  Estimated  Value.  ^ccouni 

[SMASH,  SLUMP  AND  COMPANY 


Date 

Explana- 
tion 

Amount 

Date 

Explana- 
tion 

Amount 

Less 
Com. 

Net 

1908 
July  9 

Balance  as 
per  acct.  un- 
der State- 
menf 'B"... 

Est.  Propt. 
to  P.  and  L. . . 

Brought 
down 

$261,887.33 
15.337.67 

1908 
July  9 

Inventory 
off  300.000 
par      bonds 
&  925   (es- 
timated).... 

:$377.500.00 

$375.00 

$377,135.00 

$277,125.00 

$a77,ias.oo 

T..t..     _ 

$277,125.00 

July  9 

BANKER'S  PROFIT  AND  LOSS  ACCOUNT 

Credit 


Date 


1907 
July  9 

1908 
July  9 
July  9 


Explanation 


Proftt  on  transfer  to  Syndicate  Statement 


Earned 


Bond  interest  net 

Estimated  profit  as  per  Statement' "C".' .' .' 


Net  profit  earned. 


Net  profit  earned  and  estimated. 


$250,000.00 
363,536.99 


•61,253-99 


Estimated 


$iS.a37.67 


Total 


$627,774.66 


CONDITION  OP  SYNDICATE  APPAIRS,  ETC..  AS  PER  BANKERS' 

BOOKS,  JULY  9.  Z908 

Due  from  syndicate  members,  viz* 

IZI%Z":T' ■ »4S8.3«.83 

Rieder  &  Company .■.■.;. '. lll'll^ " ?2 

Smash.  Slump  &^pany.: ::;:::        Ill-MV.lt        $MiM73..9 

Bond  interest  accrued  July  i  to  9.  1908 ,^ 

Cash  on  hand  to  be  repaid  to  bankers Hr^r^.S'^^ 

6,993,750.09 

<9.6ia.66o.a8 

Original    advances    made    by    Smash, 

BankJrjJofit'^P^'^^  '^  '^^  ^^^^^^^  «9.ooo,za3 .  .9 

6za,536.99        $9.6ia,66o.a8 


41 


TMM 


Accountancy  Problems  and  Solutions. 


Practical  Accounting  Problems. 


Problem  II. 

(New  York  Elxamination,  February,  1 909.) 

Senior  partner.  A,  desires  to  retire  from  active  business  life.  He  has 
confidence  in  the  ability  and  integrity  of  his  partner,  B,  and  both  have 
a  like  regard  for  their  sales  manager,  C,  and  their  works*  manager,  D, 
who  have  accumulated  considerable  means.  In  this  situation  B  proposes 
to  organize  and  to  continue  the  business  as  a  corporation,  under  his 
executive  management,  and  to  bring  in  sufficient  capital  from  C,  and 
D,  in  equal  parts  to  pay  off  the  principal  of  a  real  estate  mortgage 
falling  due  at  the  end  of  the  year,  and  sufficient  capital  from  E,  who 
is  not  connected  with  the  business,  to  pay  off  the  principal  of  the  firm's 
notes  payable.  It  is  contemplated  that  E  shall  be  made  the  treasurer  of 
the  corporation  and  that  the  five  parties  shall  be  the  incorporators  and 
constitute  the  first  board  of  directors. 

In  the  discussion  between  A,  and  B,  it  is  agreed  that  the  net  worth  of 
the  business,  exclusive  of  the  good-will  which  has  never  been  repre- 
sented on  the  books,  shall  be  converted  into  preferred  stock  of  the 
corporation,  and  that  the  good-will  shall  be  valued  at  one-half  of  the  net 
worth  and  be  converted  into  common  stock;  also  that  the  cash  capital 
contributed  by  C,  D,  and  E,  shall  be  paid  to  the  firm,  used  by  it  for  the 
purposes  proposed  by  B,  and  converted  into  preferred  stock  for  account 
of  the  three  parties  respectively.  Thereupon  A,  proposes  and  agrees  to 
surrender  one  fourth  of  his  share  of  the  common  stock  on  the  condition 
that  it  shall  be  distributed  as  follows:  two  parts  to  C,  two  parts  to  D. 
and  one  part  to  E. 

These  matters  are  all  covered  by  written  agreement  of  the  five  parties, 
in  which  agreement  it  is  provided  that  A,  and  B,  shall  convey  to  the 
corporation  all  the  property,  business  and  good-will  of  their  co-partner- 
ship, and  that  all  the  transactions  and  stock  distributions  provided  for 
shall  be  carried  through  and  be  closed  out  in  the  books  of  the  co-part- 
nership, including  the  sum  of  $5,000,  which  shall  be  advanced  to  enable  the 
incorporators  to  pay  fully  their  subscriptions  for  10  shares  each  of  the 
common  stock  of  the  corporation. 

A  certified  public  accountant  is  engaged  to  make  an  examination  of 
the  books  and  accounts  at  the  close  of  the  year  just  approaching,  to 
procure  appraisement  of  the  property  and  to  close  the  books  after 
providing  therein  for  his  compensation.  On  the  completion  of  his  work 
the  books  show  the  following  conditions : 


ASSETS. 

}f!t $50,000.00 

S"»^^»n«s    200,000.00 

Machinery,  etc 100,000.00 

Fmished    products,   product    in   process,    materials 

and   supplies 150,000.00 

Notes   receivable 100,000.00 

Accounts  receivable loo^oooxx) 

^^^  100,000.00 

Total  assets 


LIABILITIES  AND  CAPITAL 

Real  estate  mortgage $ioo,ooaoo 

Accrued  interest  on  real  estate  mortgage 2,5oaoo 

Notes  payable  on  demand 50,000.00 

Accrued  interest  on  notes  payable 1,000.00 

Accounts  payable ].'    asioooioo 

Accrued   taxes ^^^^ 

Reserve  provision  for  uncollectible  accounts 15  000  00 

^'^   *=^P'*^^ 400W00 

^'   *^^P*t*l 200,000.00 

Total  liabilities  and  capital 


|8oo,ooaoo 


$8oo/x)aoo 


Prepare  cash  book  and  journal  entries'  to  be  placed  on  the  books  of 
the  co-partnership  to  represent  properly  thereon  the  carrying  out  of  «U 
the  matters  provided  for  in  the  agreement  of  the  five  parties  and  to 
close  said  books. 


42 


43 


>«■&■«»«■■«■ 


Accountancy  Problems  and  Solutions. 


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44 


Practical  Accounting  Problems. 

JOURNAL  OP  THE  FIRM  OF  A.  &  B. 

Good-will  Account.         .     $300,000.00 

representing  one-half  of  the  net  worth  of 
the  firm  as  agreed  upon  by  all  parties. 

To  A.,  capital  account 

B.,  capital  account .[ 

one-half  of  the  total  for  each  mem- 
ber of  the  firm. 
The  X.  Y.  Company ^j  ^g.  q^q  ^^ 

for  all  assets  and  good-will  transferred  to  the 
above  mentioned  Co.,  as  per  bill  of  sale 
dated 190. . 

To  Land 

Buildings !.'.!.'..!* 

Machinery .'.*.*].*! 

P'inished  Product ]!!!.!!!!!] 

Notes  Receivable .'.'...*.".',[ 

Accounts  Receivable 

Cash .'.*.".'.*.'.'.' 

Goodwill 

assets  sold  and  transferred  to  the 
X.  Y.  Company  as  per  agreement, 
dated 190. . 


$150,000.00 
150,000.00 


$50,000.00 
aoo,ooo.oo 
100,000.00 
150,000.00 
100,000.00 
100,000.00 
84,000.00 
300,000.00 


Reserve  for  Bad  Debts 

Transferred  to  the  X.  Y.  Company  as  "an 
offset  to  accounts  receivable  that  may 
turn  out  uncollectible. 


$15,000.00 


$25,000.00 


Accounts  Payable 

assumed  by  the  X.  Y.  Company. 

To  X.  Y.  Company 

assumed  by  the  latter. 

Preferred  Stock t^  eo  000  o 

7500  shares  par  value  $100.00  eadi. »ooo.oo 

Common  Stock 

3000  shares  par  value  $100.00  each. 

To  X.  Y.  Company 

in    settlement    for    assets    sold    and 
transferred  to  them. 

A.  Capital  Account •^-.^  ^^^  ^^ 

for  4000  shares  of  preferred  stock  par  Value     *^**°'°°^-°° 
qpioo.oo  each. 


$40,000.00 


300,000.00 


$1,050,000.00 


B.  Capital  Account 

for  2000  shares  of  preferred  stock  par  valie 
$100.00  each. 


200,000.00 


C.   J  500  shares  of  preferred  stock  $100.00 
u.  4  par  value  to  each  of  the  above  named 

^'    {  for  advances  made -^^^ 

To  Preferred  Stock 

Distribution  as  per  agreement  dated 
190.. 


150,000.00 


^750.000.00 


45 


1 


Accountancy  Problems  and  Solutions. 

A.  Capital  Account 1150,000.00 

for  I  tjoo  shares  of  common  stock,  par  value 

f  100.00  each. 

B.  Capital  Account $150,000.00 

for  1500  shares  of  common  stock,  par  value 

$100.00  each. 

To  Common  Stock 

Distribution  of  stock  between  the  part- 
ners of  the  firm. 

A.  Capital  Account $37,500.00 

for   one-fourth   of   common   stock   to   be 
donated  as  per  agreement. 

To  Bonus  Account 

to  be  distributed  between  C,  D.,  and 
£.  as  per  agreement  dated 190. . 

Common  Stock  Donated $37,500.00 

375  shares  donated  by  A  as  per  agreement. 

To  A.  Capital  Account. . .  •  ^ 

to  close  the  latter  accounT 

Bonus  Account $37,500.00 

allocation  as  per  agreement  dated ....  190. . 

ToX 

for  two-fifths  of  the  stock  donated  by  A. 

D 

for  two-fifths  of  the  stock  donated  by  A. 

E 

for  one-fifth  of  the  stock  donated  by  A. . 

C $15,000.00 


Practical  Accounting  Problems. 


$300,000.00 


$37.50000 


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Practical  Accounting  Problems. 


Problem  12. 

(Illinois  Examination,  May,  1909.) 

By  the  partnership  deed  of  a  manufacturing  firm,  consisting  of  four 
members,  A,  B,  C,  and  D,  it  was  provided  that  in  the  event  of  the  death 
of  any  partner  before  the  expiration  of  the  partnership  by  effluxion  of 
time  on  December  31,  1911,  there  should  be  paid  to  the  legal  representatives 
of  the  deceased  the  amount  appearing  to  his  credit  on  December  31  next 
precedmg  the  death,  together  with  interest  thereon  at  5  per  cent,  per 
annum  to  December  31,  following  the  decease  corresponding  to  the  number 
of  days  that  he  Uved  during  it,  calculated  after  the  rate  of  the  average  of 
his  share  for  the  last  three  completed  years,  together  with  interest  on  such 
share  from  the  date  of  death  to  the  end  of  the  year. 

The  four  partners  shared  profits  equally,  and  each  took  interest  on  his 
capital  at  5  per  cent,  per  annum,  but  no  interest  was  charged  on  the 

ami^n5-o  Z''^'*'''^  '*  '^^  '"^  ^^  ^^^"y  "^°^^^  ^«  ^^^  sum  in 
anticipation  of  profits. 

The  surviving  partners  were  to  share  the  profits  equally.    C  died  on 

June  30,  igos.    The  profits  of  the  three  immediately  preceding  years  had 

n!^M'''f  ''  $70,000.00,  $78,000.00  and  $63,500.00.     The  proportion 

S!  -!"k  T"".'  °/  "  ''"""''"*  P''""'^^  '"'''<=''  »"<I  Profits  it  was 
stipulated  by  the  deed  of  partnership  should  be  treated  as  a  trade  expense 
of  the  year  m  which  he  died. 

With  the  aid  of  the  following  trial  balance  of  December  31,  loos  taken 
out  before  interest,  depreciation,  and  an  amount  in  lieu  of  facto^  r^° 
?nr.-,^r"u "^  L  """'P^™  manufacturing  and  profit  and  loss  accounts 
fc«>TV'  T"''  the  various  items  in  their  proper  divisions,  and  allowing 
wf^K*  ^"'■/'P™^"'""  °f  office  furniture  and  fixtures,  for  Plant  and 
Machmery  $2,500.00.  and  5  per  cent  on  the  amount  of  the  real  estate 

baLT ^7  V"  *1*  '"i  '"'"""=^>  ^°'  f'-^'-y  -"t-  Also  construct  a 
SVlf.  showing  what  was  due  to  the  deceased's  estate,  and  what 
caprtal  stood  to  the  credit  of  each  of  the  surviving  partners. 

The  inventory  at  December  31,  igo5,  was  $125,000.00.    Bills  receivable 


4B 


49 


■MmK 


-pp" 


■~:~-»  .  '  'Ml -I.  in I  I!.- 


Accountancy  Problems  and  Solutions, 


Practical  Accounting  Problems. 


Trial  Balance,  December  31,  1905 

$iao,ooo.oo 

A,  Capital  account " "  110,000.00 

B,  Capital  account 100,000.00 

C,  Capital  account '  90,000 .00 

D,  Capital  account ' ' 

•*^'       ^  .  Si  2. 000. 00 

A,  Drawing  account 

-o.,  *^*«    .4.                                    .  .  12,000.00 

B.  Drawing  account .000.00 

C.  Drawing  account ,'',000.00 

D,  Drawing  account ,00  000  00 

Inventory.  December  31.  1904. -y  ^°  ' 

Purchases  during  the  year  after  crediting 

****^                                                                  I  77c.000.00 

Bought  returns *'' '^. 

"^^  o  2c0.000.00 

Factory  wages  and  salanes.  ••••••••;••  ^  '                        ^o.ooo  .00 

Balance  of  Discount  received  and  allowea. . 

Sales  during  the  year,  after  debiting  Sold  ,,xio.ooo.oo 

returns 

Cash  on  hand  and  at  bank 16  000  00 

Bad  debts. ^. •    ••;  '       ;^o 

BiUs  receivable ^^^^  ^^ 

Office  salanes 3,500.00 

General  office  expenses ,,/ono  00 

•Lt  .    .  414.000.00 

Accounts  receivable '     «  «« 

10,000.00 
Travelmg  expenses j  000  00 

Taxes  factory....^.. •  aiooo.oo 

Rent  and  taxes,  office 60,000.00 

Real  estate. .. .^ "  ,-000.00 

Plant  and  machinery «  coo  00 

Office  furniture  and  fixtures ».5o   •  ^^^ooo  .00 

BiUs  payable 150,000.00 

Accounts  payable ■  _ -  .00  00 

Interest  and  bank  discount  paid ^'^               ■ 

$2,750,000.00  $2,750,000.00 


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Accountancy  Problems  and  Solutions, 


Practical  Accounting  Problems. 


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Accountancy  Problems  and  Solutions. 
Problem  13. 

(Illinois  Examination.  May.  1909.) 

Two  professional  linns,  consisting  of  two  partners  each,  agree  to 
amalgamate.  Jones  and  Robinson  have  accounts  receivable,  $12,500.00, 
and  other  assets  taken  as  net,  $1,250.00.  Sikes  and  Wilson  have  accounts 
receivable,  $11,000.00,  and  other  assets  net,  $1,000.00,  each  finn  brmging 
$2,500.00  in  cash  and  discharging  their  own  liabilities,  with  an  arrange- 
ment that  the  partners  of  each  firm  shall  have  a  preferential  allowance  of 
15  per  cent,  on  professional  fees  arising  from  the  connections  of  each 

firm. 

At  the  end  of  twelve  months  the  earnings  were  $49»500.oo,  of  which 
$19,000.00  came  from  Jones  and  Robinson's  introduction,  $23,000.00  from 
Sikes  and  Wilson's  and  the  rest  from  neutral  ground.  The  accounts  re- 
ceivable of  Jones  and  Robinson  were  realized  at  an  average  loss  of  0 
per  cent,  those  of  Sikes  and  Wilson  at  5  per  cent  The  expenses  were 
$16,725.00.  As  at  the  end  of  the  year,  make  out  the  Realization  Account 
of  each  firm,  the  Profit  and  Loss  Account  of  the  amalgamated  firm,  and 
the  Capital  Accounts  of  each  partner,  allowing  interest  on  the  net  assets 
and  cash  brought  in  at  5  per  cent  per  annum,  but  none  on  the  Accounts 
Receivable.  The  drawings  have  been:  Jones,  $5,000.00;  Robinson, 
$3,250.00;  Sikes,  $5,500.00;  Wilson,  $3,500.00,  without  interest. 

Profits  are  divided  as  follows:  Jones  and  Sikes,  three-tenths  each; 
Robinson  and  Wilson,  two-tenths  each.  The  same  proportions  govern  the 
divisions  of  assets  brought  in  and  the  Preferential  Allowances. 


Solution. 

Jones  and  Robinson's  Realization  Account 


Assets  to  be  realized 

To  «rtimated  value  of  assets: 
Accounts  receiv- 

able $12,500 

Other  assets 1,250 

Cash. .  •     2,500 

$16,250 


Assets  realized 

By  cash  proceeds  of  reali- 
zation      $13,000 

By  cash  brought  in 2,500 

$15,500 


To  Jones,  %  share. . .   $9,750 
To  Robinson,   %. 

share 6,500  $16,250 


$16,250 


I 

By  loss  on  realization. .  . . 
By  Jones,  %  share. . .  $450 
By   Robinson,    % 

share 300 


I 


750 


I16.250 


Practical  Accounting  Problems. 
Sikes  and  Wilson's  Realization  Account 


Assets  to  be  realized 

To  estimated  value  of  assets: 
Account  receiv- 
able  $11,000 

Other  assets 1,000 

Cash 2,500 

$14,500 


To  Sikes,  %  share.. .   $8,700 

To  W ilson,  %  share .      5,800  $14,500 


$14,500 


Assets  realized 

By  cash  proceeds  of  reali- 
zation  

By  cash  brought  in 


$11,450 
2,500 

♦13.950 


By  loss  on  realization 

Sikes,  %  share $330 

Wilson,  %  share. . 


SSo 


220 


$14,500 


Jones'  Capital  Account 


Todrawings....    ..  $5,000.00 

10%  loss  on  realization  450 .  00 

To  balance  down 13,956.25 


$19,406.25 


By  %  share  of  Jones, 
and  Robinsons'  reali- 

R,f^*^^"/ $9,750.00 

By  %  share  of  prefer- 
ential allowances ....       1,710.00 
By  %  share  of  interest .  112.50 

By  %o  share  of  net  profits    7,833 .  75 

$19,406.25 


By  balance $13,956.25 


Robinson's  Capital  Account 


To  drawings $3,250 .00 

To  %  loss  on  realization  300.00 

To  balance  down 9,387 . 50 


112,937.50 


By  %  share  of  Jones. 

and  Robinson's  reali- 

p^^^^ion $6,500.00 

i>y  %    share  of  prefer- 

ential  allowances. ...       1,140 .  00 
By  %  share  of  interest. .  75.00 

AO  %o  share  of  net  prof- 

^^ 5,222.50 

$12,937.50 

By  balance $9,387.50 


•)*? 


55 


11 


11 


Accountancy  Problems  and  Solutions. 
SiKEs'  Capital  Account 


To  drawings $5,500.00 

To  %  share  of  loss  on 

nalization 330.00 

To  balance  down 13,878 .  75 


118,708.75 


By  %  share  of  Sikes. 
and  Wilson's  realiza- 
tion  

By  %  share  of  prefer- 
ential allowances. . . . 

By  %  share  of  interest. 

By  %o  share  of  net  prof- 
its  


8,700.00 

3,070.00 
105.00 

7.833-75 
$18,708.75 


By  balance $12,878.75 


Wilson's  Capital  Account 


To  drawings $3,500.00 

To  %   share  of  loss  on 

realization 320 .00 

To  balance  down 8,753 .  50 


$13,473.50 


By  %  share  of  Sikes 
and  Wilson's  realiza- 

By  %  share  of  prefer- 
ential allowances. . . . 

By  %  share  of  interest. 

By  %o  share  of  net  prof- 
its  


$5,800.00 

70.00 
1,380.00 

m 
5,332.50 

$13,472.50 


By  balance $8,752.50 


Practical  Accounting  Problems. 

Problem   14. 
(New  York  Examination,  June.  1909.) 

A  new  corporation,  "D,"  is  formed  to  purchase  and  amalgamate 
the  busmess  of  three  corporations,  "A,"  "B,"  and  "C."  carrying  on  the 
same  class  of  business,  at  December  31st,  1908. 

There  are  considerable  differences  between  the  capitals,  the  gross  sales 
the  expenses  and  the  net  profits  of  the  three  corporations.     The  amount 
to  be  allotted  to  each  in  shares  of  the  new  corporation  for  its  capital  and 
good  will  is  agreed  to  be  referred  to  you. 

Using  your  own  figures,  construct  and  give  a  profit  and  loss  account 
for  five  years  ended  December  31st,  1908,  and  balance  sheet,  showing 
!!1  »'*f^  .'?*^^'"  ^^^"^  ^^P^*^^'  ^*  I>ecember  31st,  1908,  for  Corporations 
*t.      ^     '  '^'"  ^^^strating  the  foregoing  particulars,  and  assume 

that  Corporation  "A"  shows  a  larger  profit  on  a  smaUer  capital  than 
either  of  the  others. 

Give  the  balance  sheet  of  the  new  Corporation  "D"  as  it  will  appear 
as  the  result  of  your  Report,  and  state  your  reasons  for  the  allotment 
you  consider  equitable. 


Solud 


on. 


EXHIBIT  "A" 

Balance  Sheets 
as  on  December  31,  1908 


flR| 


jfi 


Assets 


Real  estate 

Merchandise 

Notes  receivable. 
Trade  debtors. . . 
Cash 


Totals. 


Liabilities 

Capital  stock 

Notes  payable 

Trade  creditors. . . 
Suxplus 


Corporation 

"A" 

$30,000.00 

18,000.00 

15,000.00 

8,000.00 

7,000.00 


$78,000.00 


$50,000.00 

6,000.00 

14,000.00 

8,000.00 


Totals I      $78, 


,000.00 


57 


Corporation 

"B" 

$50,000.00 

36,000.00 

9,000.00 

17,000.00 

17,000.00 


$119,000.00 


$100,000.00 

5,000.00 

12,000.00 

3,000.00 


Corporation 
"C" 
$90,000.00 
50,000.00 
15,000.00 
46,000.00 
40,000.00 


$241,000.00 


$200,000.00 
11,000.00 
20,000.00 
10,000.00 


$119,000.00    I     $241, 


000.00 


Accountancy  Problems  and  Solutions, 

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Practical  Accounting  Problems. 

EXHIBIT  "C" 

Combined  Profit  and  Loss  Statement 

from  December  31.  1904.  to  December  31,  1908 


Corporation  "A" 


Accounts 


1904 


1905 


Gross  sales 

Cost  of  manufacture 

Gross  profits 

Trading  expenses. . . 
Net  profits 


$100,000 
55»ooo 
45-000 
20,000 
25,000 


$121,000 
80,000 
41,000 
23,000 
18,000 


1906 


$130,000 
82,000 
48,000 
21,000 
27,000 


1907 


1908 


$128,000  $140,000 
81,000  90,000 
47.000  50,000 
24,000   23,000 


23,000 


27,000 


Corporation  "B" 


Accounts 


1904 


1905 


Gross  sales 

Cost  of  manufacture . 

Gross  profits 

Trading  expenses. . . . 
Net  profits 


$120,000 
80,000 
40,000 
25,000 
15,000 


I 


$125,000 
90,000 
35,000 
21,000 
14,000 


1906 


1907 


$130,000 
85,000 
45.000 
30,000 
15.000 


$100,000 
60,000 
40,000 
26,000 
14,000 


1908 

$140,000 
92,000 
48,000 
36,000 
12,000 


Corporation  "C" 


r  10,000 


Gross  sales 

Cost  of  manufacture 

Gross  profits .' .  .      9^,000 

Tradmg  expenses 60,000 

Net  profits 


$200,000  $250,000 


125,000 
125,000 
70,000 
55.000 


$240,000 
120,000 
120,000 
50,000 
70,000 


$195,000 

100,000 

95,000 

55,000 

40,000 


$300,000 
170,000 
130,000 
75.000 
55.000 


58 


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Stock 

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Good  Will 
as  Stated 

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Corporation  "B" 

Corporation  "C" 

• 

( 


Practical  Accounting  Problems. 

Tbxt  op  Rbport 

Chicago,  May  i,  1909. 
To  THE  President  of  Corporation  "D,"  Chicago,  111. 

Dear  Sir:  In  accordance  with  your  instructions  and  for  the  purpose 
of  a  proposed  purchase  and  amalgamationof  Corporations  "A,"  "B,"  and 
"C,"  I  have  made  a  thorough  and  comprehensive  investigation  of  the  books 
and  accounts  of  said  Corporations  in  order  to  determine  their  annual  net 
earning  capacity  for  the  last  five  years  and  also  in  order  to  verify  the 
valuations  of  said  corporate  assets  with  the  object  in  view  of  a  fair  and 
reasonable  distribution  of  consolidated  capital  stock. 

As  a  result  of   said   investigation,  I  herewith  beg    to   submit    the 
following  exhibits,  viz.: 
Exhibit  "A"  Balance  Sheets  of  Corporations  "A,"  "B"  and  "C"  as  on 

December  31,  1908. 
Exhibit  "B"  Consolidated  Balance  Sheet  as  on  December  31,  1908. 
Exhibit  "C"  Statement  of  Profit  and  Loss  for  the  five  years  ending  De- 
cember 31,  1908,  of  Corporations  "A,"  *'B"  and  "C." 
Exhibit  "D"  Statement  of  proposed  basis  for  merger. 

Exhibit  "E"  Statement  of  proposed  distribution  of  consolidated  stock. 

The  assets  of  Corporations  "A,"  "B"  and  "C"  are  conservatively 
stated  so  as  to  disclose  the  true  state  of  affairs. 

The  pure  trading  profits  of  the  corporations,  as  stated  in  exhibit  "C," 
give  a  reasonable  idea  of  the  earnings  on  the  basis  of  past  results  for  a 
period  of  five  years.  As  a  basis  for  consolidation  and  an  equitable  distri- 
bution of  amalgamated  stock,  I  respectfully  propose  the  following  scheme. 
In  my  opinion,  a  fair  basis  for  the  apportionment  of  capital  stock  can 
be  established  only  by  a  separation  of  assets  and  good  will.  The  average 
net  capital  for  the  period  under  review  equals  the  paid  up  capital  stock 
of  the  Corporations;  hence,  a  portion  of  the  merged  capital  stock  may 
be  distributed  on  this  basis  alone,  as  shown  in  exhibit  "E."  In  order  to 
determine  the  earning  capacity,  the  assets  compared  with  the  earnings 
are  the  average  net  assets  for  the  five  years,  and  such  assets  of  all  members 
of  the  combination  shall  be  given  equal  weight. 

The  second  portion  may  be  based  on  the  average  annual  good  will  on 
the  basis  of  the  excess  of  earning  capacity  over  a  normal  income,  in  this 
mstance  6%,  as  shown  in  exhibit  "D." 

Since  the  total  average  earnings  are  $90,000  per  annum,  the  capi- 
talization  of  the  merger  at  6%  would  be  $1,500,000,  of  which  $350,000 
would  be  apportioned  on  the  basis  of  the  average  net  capital  and 
$1,150,000  would  be  distributed  on  the  basis  of  good  will,  as  set  out  in 
exhibit  "E,"  showing  the  ultimate  distribution  under  this  plan. 

Under  the  assumption  that  the  future  earnings  of  the  merger  would 
be  the  same  as  before,  or  higher,  or  lower  than  before,  the  members  of 
the  combination  would  share  the  income  in  the  same  ratio  as  before,  and 
an  equitable  distribution  is  an  established  fact. 

Respectfully  submitted, 


61 


Accountant. 


i 


Accountancy  Problems  and  Sohitions. 

Problem  15. 
(New  York  Examination.  June.  1909.) 

John  Dickside,  a  manufacturer's  agrent  who  starts  in  business  with  a 
cash  capital  of  $15,000,  receives  from  the  manufacturer  $45,000  of  goods 
on  consignment,  subject  to  a  discount  of  5%  when  he  pays  for  the  goods. 

iJickside  pays  freight  amounting  to  $1,400,  and  allows  claims  for  dam- 
aged goods  amounting  to  $1,500.  the  total  of  which  is  chargeable  to  the 
manufacturer.  He  sells  all  of  the  consigned  goods  for  a  total  of  $60,000, 
and  receives  $44,000  from  his  customers,  allowing  them  in  settlement  of 
the  accounts  $400  discount  and  $600  for  defective  goods.  He  makes  the 
following  payments:  $2,100  for  freight,  of  which  $1,400  is  chargeable  to 

iLrtu^^^^^^^^         ^'°^^=  ^ ''''  ^^^--=  ^^  ^'-  ^^y^  ^^^ 

Prepare  account  of  sales  to  be  rendered  to  the  manufacturer,  balance 
sucet,  statement  of  profit  and  loss,  and  statement  of  capital  account. 


Solution. 

•  J'!f  problem  states  that  Dickside  receives  a  consignment  from  which  he 
II  min  r..^  ^'V'f  •  -"^'''T'  "^i!^"  emitting.  This  could  be  construed 
ZZ  \Tr^^^'^^  ''  -''"'"«^  ^^-^  ^°^**^  °"  ^  5  per  cent,  commission 
oasis  But,  If  you  take  into  consideration  that  Dickside  pays  $700  for 
freight,  allows  $400  discount  to  his  customers,  and  $600  for  defective 
goods,  and  incurs  expenses  of  $900,  none  of  which  the  manufacturer  is 

f  rnZ^iccflT  •  ^^  ^^uJ^  "°^  ^"  •'"P^"^  "^'^^  t^^  "^"^»  procedure  of 
a  commission  business,  but  more  on  the  order  of  commercial  transactions 
that  are  somewhat  along  this  line.  uan^acuons 

Mr.  Dickside  is  a  commission  merchant,  broker,  jobber,  retailer  or 
^nnA/^'l,  ■  ^.^  T'"'*'  ^^*^  ^  "manufacturer  to  dispose  of  a  lot  of 
he  will  «t  '^'tL'^u    ''  ^  ^^"^'S^^T^ent.  but  the  probabilities  are  that 

n^rZL  I'  f  u  ""  ^^a  '"^'^***^  ^  memorandum  bill,  subject  to  5 
per  cent,  discount  when  paid,  and  I  will  sell  what  I  can.' 

They  are  billed  to  him  at  $45,000  as  commonlv  stated,  on  mem- 
orandum, subject  to  5  .per  cent,  discount  when  paid.    He  may  further 

d^TLr^T" laZ'T  '^  ?'  ^'^'^^K-^^^^-^  --^  will  surely  make 
claim  for  any  goods  damaged  in  transit  or  otherwise.  Now  it  has 
never  occurred  to  him  that  this  is  a  consignment  and  that  he  must 
account  for  the  amount  realized  minus  certain  expenses,  commissions, 
etc.  He  knows  the  goods  were  billed  to  him  at  $45,000.  less  $1,500  foi^ 
damaged  goods,  and  that  he  is  responsible  for  that  amount  less  discount 
and   ireight. 

He  sells  the  goods  at  the  highest  price,  say  $60,000.  and  on  credit. 
He  takes  a  certain  amount  of  risk,  but  figures  that  he  will  at  least  more 
than  clear  enough  to  pay  the  manufacturer  and  expenses,  as  his  collec- 
tions later  show. 

This  seems  to  be  a  reasonable  construction,  and  gives  to  Dickside  a 

profit  more  in  keeping  with  the  amount  involved  and  the  risk  incurred. 

62 


Practical  Accounting  Problems. 


r 


Profit  and  Loss  Account 
To  consignment. .  ..$45,000.00 
Less    damage    al- 
lowed by  shipper     1,500.00      $43.500 .  00     Sales , 

To  allowance  made 
to  customers  for 
defective  goods .       $600.00 

$44,100.00 
Gross  profit $15,900.00 

$60,000.00 

rht'^i'^f^u----     '^-'oooo  Gross  profit.. 

Charged  to  shipper      1,400.00  $700 .  00     Discount  earned .' ." .' 

Exoense  Discount  allowed. . . 

expense     . . . .      .  ^^^  ^^ 

Net  profit 16,075.00 

$17,675  00 


$60,900.00 


$60,000.  33 


•  • $15,000.00 

$2,175. 00 

400.00  1.775.00 


$17,675.00 


Cash 

Customers . 


Assets 


Capital  Account 

giXf/°ient $15,000.00 

^'^fi* 16,075.00 

$31,075  00 

Balance  Sheet 

Liabilities 
$18,050.00     Shipper •-  -..  „ 

'^'°°°-°°  Capital ::::::::::::  T^illol 

j3MSo^  $33,050.00 


Sales  Account 


Consignment 9.-  „_„  „„ 

Less  damaged  good^ ! . ! '. '.  1 !  1 '.      '*^'       '  °° 


1,500.00 


Charges: 
5%     discount    on 


$43,500.00 

^""'^^^ 1.400.00        $3.575.00 

f I!!**'**l*° slipper. . . .      $39,025.00 
Less  cash  paid 37.050.00 

Balance  due  shipper. . .        $1,975 .00 


Cash  Account 

Capital •,  „  T^    .  , 

Customers .$44,400.00      *"'°"'°-'"='     ^^h, »...o<,.oo 

°"''""" __4oo^o^_44;ooo^  iSSr^.v.::;;:;::;:;;;:;:;-  ^.ITo.il 


To  balance. 


$59,000 .  00 

$18,050.00 


Balance. 


1,805 .00 

?50,ooo .  00 


i 


63 


Accountancy  Problems  and  Solutions. 

Problem   16. 
(New  York  Examination.  June.  1909.) 

A  and  B  are  dealers  in  bonds  and  share  profits  in  the  proportion  of 
A  seventy-five  (75)  per  cent 
B  twenty-five  (25)  per  cent 

A  and  B  engage  C  to  sell  bonds,  agreeing  to  pay  him  a  salary  equal  to 
twenty-five  (25)  per  cent  of  the  net  profits  to  be  divided  between  the 
partners. 

During  the  continuance  of  Cs  contract  the  firm  purchases  one  hundred 
thousand  dollars  ($100,000)  Waterville  Traction  Company  first  mortgage 
5%  bonds  on  a  3%  basis.  The  bonds  have  eighteen  (18)  months  to  run. 
interest  payable  semi-annually  (three  interest  periods).  The  firm  holds 
the  Waterville  bonds  till  maturity. 

Prepare  a  statement  of  the  Waterville  bond  accounts,  showing  cost 
interest  and  amortization.  The  total  profit  to  be  adjusted  is  ten  thousand 
dollars  ($10,000).    Show  the  division  of  this  profit 


Solution. 

Operations  to  find  the  present  worth  of  a  5%  $1,000  bond  "on  a  3% 
basis,    interest  payable  semi-annually. 

OPERATION  A. 

Present  worth  of  $1,000  at  .015%  for  3  half  years: 

I  at  compound  interest,  .015%.  3  terms  =  i.04568; 
I  -i-  1.04568  =  .95632  X  1,000  =  $956.32. 

Present  worth  of  $25.  semi-annual  cash  interest,  at  .015%  for  3  terms  • 

i-M.04568=.95632;i  — .95632  =  .04368  -^  .015%  =  2.9122  X  $25  =  $7280' 

956.32  +  72.80  =  1029.12  for  one  $1,000  bond; 

1029.12  X  100  =  $102,912,  cost  of  bonds. 


Cash  rate        2^% 
Income  rate   i%% 

Sinking  fund 
to  amortize  premiums  $2,912. 


3- 

$2500.00  interest 
1543  68  interest 


=    $956.32 


64 


Practical  Accounting  Problems. 

OPERATION  B. 

Cash  rate      .025%  z=  25.00  interest 
Income  rate  .015%  =  15.00  interest 

Surplus  interest      =  10.00 

'    (I  +  .015)  ^  =  $2.91220 

.015 
and  2.91220  X  10  =  29.1220. 
+  1,000 


1.029    1220 


=  $102,912.20 


.015%  =  6.375466.  and 


BoJid  rfhhl''*''^  '^'  ''"°""'  ^^'"  *"  ^^^^*=^^°^  ^Prague's  "Extended 

OPERATION  C 
.05%  =  Cash  interest 
.03%  =  Income  basis. 
.05  -ir  .03  =  i.6666-f  =  Stoclc  value. 
i.6666-f 
— I. 

o.6666-f-  =  Stock  premium. 

Present  worth  of  .6666+  due  in  3  half  years 
the  stock  value  being      1.6666667 
and  the  difference         0.6375466 

the  lYz  years'  value  is  =  1.0291201 

Hence,  1.0291201  X  i.ooo  =  $1,029.12  for  one  bond  @  1,000. 

Division  of  Profits. 
Total  profits,  before  adjusting  Cs  salary f lAooonn 

2,000.00 

XT  i-  $8,000.00 

Wet  profits  to  be  divided  between  A  and  B  =  '' '~ 

As  share,  75% ^ 

B's  share,  25%...  ^'°^  ^« 

2,000  $8,000.00 

STATEMENT  OF  THE  BOND  ACCOUNTS. 

5%  Bond  of  the  Waterville  Traction  Co. 


Date 


Total 

Interest 

5% 


Net 

Income 

3% 


1908  Jan.  T  $2,500.00 
July  I     2.500.00 

1909  Jan.  I     2,500.00 

$7,500.00 


Amorti- 
zation 


Si,S43-68 

i»529.44 
1,514.88 


$4,588.00 


Cost 
*   956.32 
970.56 

985-12 


Book 
Value 


Par 
Palue 


$2,912.00 


$  102,91  2. 00|$I00,000.00 

101,955.68 
100,985.12 
100,000.00 


65 


Accountancy  Problems  and  Solutions. 
Problem  17. 


^ 


(This  is  not  a  C  P.  A.  problem,  but  contains  some  of  the  important 
principles  involved  in  corporation  accounting,  and  shows  the  effect  of  the 
panic  of  1907  on  the  Interstate  Manufacturing  Company.) 

The  trial  balance  of  the  Interstate  Manufacturing  Company,  on  June 
30th,  1907,  after  closing  entries  have  been  made,  is  given  below : 

P^nts  and  good  will $250,000.00 

Office Furmture g  y.^  qq 

Inventory,  June  30,  1907  ' 

Supplies ; ; ;       Igll  ol 

Finished  goods W.V.'.  A2\^6J '  00 

Pettycash iooloo 

i^^fi: 270,000.00 

Buildings i6c,ooo.oo 

Machinery 235,000.00 

Cash  subject  to  check 69  4^1 «  00 

Accounts  receivable ,  .  273I842 '.  00 

Common  capital  stock '       '              j-q-  q-. 

Preferred  capital  stock l^^'       [  ^^ 

Bonds  6  per  cent.  50  year  ist  mortgage 

issued  June  30, 1907 200,000.00 

Premium  on  bonds 20  000  00 

Pref .  stock  dividends  payable  Aug.  1907.  1 7  *  coo  00 

Com.  stock  dividend  payable  Aug..  1907  li'.sooloo 

Reserve  for  bad  and  doubtful  accounts. . .  8,204  00 

Undivided  surplus 66^7  c 

Accounts  payable ] .  ^^[^^1  [  ^^ 

$1,403,061.00      $1,403,061.00 

During  the  year  ending  June  30th,  1908,  the  company  purchased  29,047 
tons  of  raw  material  at  $22  per  ton,  which  was  delivered  before  the  books 
dosed.  Of  the  amount  purchased,  payment  has  been  made  for  26,647  tons. 
They  have  also  made  payments  for  the  following  accounts : 

Accounts  payable,  $78,392;  salaries,  $80,360;  selling  expense,  $86,017; 
labor,  $468,932;  shop  expense,  $9,461;  taxes,  $7,842;  repairs  and  mainte- 
nace,  $30,955;  office  expense,  $2,478,  and  supplies,  $37,637. 

Customers  have  paid  $1,502,927  in  cash,  and  have  been  given  dis- 
counts amounting  to  $i8,39S-  Returns  and  allowances  amount  to  $8,474. 
Bad  debts  written  off,  $2407.    Rent,  $500,  and  sales,  $1,515,572. 

Fifty  thousand  dollars  was  loaned  on  call  on  June  30th,  1908,  the  market 
value  of  the  collateral  security  being  $72,100. 

The  inventon/  on  June  30.  1908.  is  made  up  of  finished  goods,  $20,495; 
supplies,  $8,129,  and  $2,163  tons  of  raw  material,  the  market  price  of  which 
is  $24  per  ton.    The  land  is  estimated  to  be  worth  $300,000. 

Semi-annual  dividends  of  3^%  on  the  preferred  stock  and  2^%  on 
the  common  stock  have  been  paid  from  the  earnings  of  the  half  year  end- 

66 


Practical  Accounting  Problems. 

ing  December  31,  1907.  Dividends  at  the  same  rate  have  been  declared 
on  the  preferred  and  common  stock  for  the  last  half  of  the  fiscal  year, 
payable  in  August,  1908. 

You  are  asked  to  set  up  a  balance  sheet  dated  June  30,  1908,  and  ac- 
company it  with  a  business  statement  which  will  show  correctly  the  condi- 
tion of  the  company. 

The  following  annual  rates  of  depreciation  are  to  be  assumed. 

Buildings,  3% ;  machinery,  75^% ;  office  furniture,  10%.  It  is  also  as- 
sumed that  there  should  be  a  reserve  for  bad  and  doubtful  accounts  equal 
to  3%  of  the  balance  of  accounts  receivable. 


b 


Solution. 

PROFIT  AND  LOSS  AND  INCOME  STATEMENT  FOR  THE  YEAR 

ENDING  JUNE  30th,  1908. 

^^J-®^-  •  •  1 •    ■  • $1,515,572.00 

Less  returns  and  allowances 8,474.00     $1,507,098.00 

Prime   Cost   and   Overhead    on  Goods 
Manufactured. 

Raw  Material 674,695.00 

^^^% 468.932.00 

|;jPP^l|S 34.440.00 

Shop  Expense 9,461.00 

Repairs  and  Maintenance 30,955.00 

Depreciation  of  machinery 17,625.00 

Depreciation  of  buildings 4^950*00 

^jjjj  $1,241,058.00 

Finished  goods  on  hand,  June  30,  1907. .        42,761.00 

Deduct  $1,283.8x9.00 

Finished  goods  on  hand,  June  30, 1908 .. .  20.495.00 

Cost  OF  Goods  Sold. $1.263,324.00 

Balance,  gross  profits $243,774.00 

Other  Income. 

Rent 

500.00 

r^  «  $244,274.00 

General  and  Selling  Expenses. 

Salaries fro.  .^^  „„ 

filing  expense ■.■.•.•.■.■;.•;.•.■.•;  *'8°6fox°7.:: 

Discount  on  sales t«  ,«;  «« 

Officeexpenses All° 

Depreciation  of  furniture '..'.'.""  ilc'la 

Taxes ^rs-oo 

7,842.00        $195,967.00 

Balance ~I~Z 

$40,307.00 

67 


Accountancy  Problems  and  Solutions. 

Deduct. 

Interest  on  50  years  6%  Bonds $12,000.00 

premium  written  off 400.00 


.f8 


I 


Vi 


3%  reserve  for  bad  and  doubtful  debts. . . 

Balance,  net  profit 

Add. 

Undivided  surplus  on  June  30, 1907 

Making  a  total  of 

Deduct. 
Dividends  for  the  year: 
On  preferred  capital  stock  s}4%  paid 

February,  1908 

On  preferred  capital  stock  $}{%  payable 

August,  1908 

On  common  capital  stock   2^%   paid 

February,  1908 

On  common  capital  stock  23^%  payable 
August,  1908 

Balance  surplus,  June  30,  1908 


11.600.00 

$36,707.00 
7,716.00 

$28,991.00 

66,375.00 
$95,366.00 


I 


$17,500.00 
17,500.00 
12,500.00 
12,500.00 


$60,000.00 
$35,366.00 


68 


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69 


ij 


Accountancy  Problems  and  Solutions. 


Problem  18. 

(Michigan  Examination,  July,  1909.) 

X,  Y  and  Z,  foundry  men,  unable  to  meet  their  obligations,  suspend 
payment  January  i,  1908,  and  appoint  a  trustee  to  realize  and  liquidate 
for  the  benefit  of  their  creditors.  The  books  showed  the  following 
assets  and  liabilities : 


Assets 

Land  and  Buildings. . . 
Machinery  &  Tools.  . . 
Furniture  &  Fixtures . 
Materials  &  Supplies. . 

Notes  Receivable 

Accounts  Receivable. . 
Cash , 


Liabilities 

$125,000.00     Mortgage  on  Foundry 

75,000.00         Premises $100,000.00 

10,000 .00     Notes  Payable 135,000..  00 

95,000 .00    Accounts  Payable. 105,000 .00 

15,000.00     Interest     accrued     on 

115,000.00         Mortgage 1,250.00 

450.00     Taxes    accrued    (esti- 
mated)    835 .00 

Capital 93,365 .00 

1435.450-00  $435,450.00 


I 


The  trustee's  cash  receipts  and  payments  during  the  year  1908  were  as 
follows: 


Receipts 

ANotes  Receivable  (Out- 
stimding  January  i, 
1908) 

♦^Accounts  Receivable 
(Outstanding  Janu- 
ary I,  1908) 

"•Cash  Sales 

/Notes  Receivable  (Con- 
tracted during  1908^. 
Accounts      Receivable 
(Contracted    during 
1908) 


Payments 

^Notes  Payable $25,000 . 00 v 

^Accounts  Payable 35,000 .  00 1 

$15,000.00  •Interest   on   Mortgage 

one  year  at  5% 5,000.00 

•^fTaxes  for  year  1907 865 .  00 

106,500.00    nPiirchase    of    Material 

5.435  -oo         and  Supplies 98,000. 00 

^.Labor 135,000.00 

13,500.00  'Oeneral Expenses 45,000.00 

•^Interest  on  Bills  Pay- 
able to  Sept.  30,  '08 

212,000.00 V'    at  5% 2,800 .00 


Total  Receipts $352,435  00     Total  Payments $346,665 .00 


70 


Practical  Accounting  Problems. 


t 


Other  transactions  were  as  follows : 
Sales  on  Credit 


V\: 


^^335.000.00 

*■     10,000.00 


00 


00.00 


Bad  debts  written  off  accounts  prior  to  Jan.    / 

I,     1908 /*Q    -_^      „^ 

•r>       J      J^-l    .  ■..  rr «t$,000  .  00 

Bad  debts  written  off  accounts  subsequent  to 
Jan.  I,  1908 y  3^000.00 

Discounts  and  allowances  to  Customers'  Ac-"/ 
counts  prior  to  January  i,  1908 '«^oo 

Discounts  and  allowances  to  Customers'  Ac-  ' 

coimts  subsequent  to  January  i,  1908 ^3 

Notes  received  from  customers 

Notes  given  to  creditors  ($110,000.00  being V^ 

newals) ^ 

A  Inventory  of  Materials,  becemi3er  31,  1908 . 

Solution. 

Realization  and  Liquidation  Account  rendered  by  the  Trustee  of 

X,  Y   and  Z. 


800 .00 

20,000.00 

180,000 .00^ 
92,000.00 


ASSETS   TO    BE    REALIZED: 

*5Notes  Receivable.  $15,000 

^Accounts  Receivable. 
Materials  &  Supplies 
•^Pumiture  &  Fixtures, 
•^Machinery  &  Tools. 
"^Laxid  &  Buildings  . . 


115,000 

95iOoo 

10,000 

7S,ooo 
125,000  $435,000.00 


LIABILITIES   TO    BE   LIQUIDATED: 

•^Notes  Payable $135,000* 

-Accounts  Payable.     ..    lofooo, 

*•  Taxes  accrued        "  g.J 

r  Mortgage loo.oli 

H  interest    on   mortgage 


accrued. 


1.250^  $34a,o8$.oo 


LIABILITIES    liquidated: 

^An^^  Payable    $25,000  ' 

*^ Accounts  Payable     ...    35.000 

•*-  Taxes  accrued 83s 

l<i,Interest    accrued    on 
mortgage 


ASSETS  realized: 


Notes  Receivable    . .    $15  ©oo 
•AAccounts  Receivable     lob.'soo  fiai.soo.oo 


1.250      $62,085.00 


LIABILITIES    NOT   LIQUIDATED: 

"t  A  °*^  Payable $1 10  000  J 


ASSETS   NOT   REALIZED: 

<  Furniture  &  Fixtures..    $10,000: 
'^  Machinerv  &  Tnnls  \  - ' i 


SUPPLEMENTARY   CHARGES: 

"•Vurchase   of   materials 

-^Labo?''**'""' «'^«'°°° 

^  General  E'xpens;.;;.:::  'ilooo 
Alnterest    on    mortgage 
(mcluding  accrued 

'^  Interest  oniNoVesPayl      ^'^'^ 
able -  o_„ 

r  Taxes,  balance  for  igo? 

$30.       Estimate    for 

'****  '^^5 895    $356,695.00 


SUPPLEMENTARY   CREDITS: 

"^^  Sales  on 

m^n  ^^\-  •  ■  •  ^335.000 

-^Cash  Sales  .        5.435    $340,435 

VNLess    bad 

debts (1908 
^     only).   ..         $a,ooo 
'discounts  & 

allowances 


(1908  only). 


300 


2.300 


^entory  of  materials  *^^^''^^ 

*  ^^PP^^"^^ ga.ooo  $430,135.00 

Net  Loss 


$1,133,780.00 


30,060.00 


$1,133,780.00 


71 


Accountancy  Problems  and  Solutions. 


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72 


Practical  Accounting  Problems. 
Problem  19. 

(Michigan  Examination,  July,   1909.) 

On  January  i,  the  Fairview  Real  Estate  Association  was  incorporated 
the  capital  subscribed  and  paid  in  being  $30,000,  divided  into  30  shares'. 
The  association  purchased  improved  property  for  speculative  purposes 
paymg  cash  $30,000.00  and  giving  a  first  mortgage  for  $60,000.00  at  6%' 

The  association  organized  and  incorporates  on  the  same  day  the  Fair- 
view  Club  with  30  proprietary  members  (being  the  stockholders  of  the 
real  estate  association)  and  30  associate  members  who  have  no  proprietary 
interest,  but  enjoy  all  privileges  without  incurring  any  of  the  liabilities 
The  annual  dues  are  $100.00  a  year,  paid  by  all  in  advance 

The  association  leases  to  the  club  the  property  aforesaid,  the  con- 
sideration in  heu  of  rent,  being  the  payment  by  the  club  of  all  sums  for 
taxes,  betterments,  interest,  fixtures,  furniture,  etc. 

The  proprietary  members  are  assessed  $300.00  each,  and  by  a  sub- 
sequent resolution  of  the  association  are  to  receive  credit  therefor  with 
mterest  at  6%.     Five  members  fail  to  pay  the  assessment 

The  association  having  executed  a  contract  for  the  sale  of  the  pro- 
perty for  $110,000.00  the  club  disbands  at  the  end  of  the  year 

Ihe  club  expenditures  for  the  year  were  as  follows;  Taxes  $1,800  oo- 
interest  on  mortgage  $3  600.00;  Repairs  $1,000.00;  Improvements 
$3,000  00;  Furniture  and  fixtures  $2,000.00;  General  Expenses  $500.00 
Help  (sundry  employees)  $1,600.00.  ^ 

There  were  house  charges  against  the  members  $500.00,  which  were 
subsequently  collected;   and  there  were  payable  book  debts  of  $4,000  00 
t  ?|c^^<i  assessment  of  $100.00  called  for  to  pay  off  the  club  debts,  was 
paid  by  the  proprietary  members  of  the  association. 
o«/^i^?l^°l^^^^  entries,  raise  and  close  accounts  on  the  association 
and  club  books,  and  prepare  balance  sheet  and  revenue  account  for  each 

Solution. 

JOURNAL 

OF    THE 

FAIRVIEW  REAL  ESTATE  ASSOCIATION. 
January,  1909. 

.  .^»»    '^^^  FAIRVIEW  REAL  ESTATE  ASSOCIATION 

irAru'n^   ORGANIZED   JANUARY    I,    1909,    UNDER  THE    LaWs   OF  THE 

OTATE    OF ,    WITH    A    CAPITAL    SUBSCRIBED    AND   PAID    IN    OF 

$30,000.00, 
DIVIDED    INTO    30    SHARES.    EACH    $I,0OO    PAR. 

Subscribers j 

For  their  shares  of  subscribed  stock  of  The     *^°'°°°  •°° 
Fairview  Real  Estate  Association. 
To  Capital  Stock  ...  ^ 

Issued  to  the  subscribers,'  as  'per'their  ♦3o.ooo .  oo 

subscriptions. 

Cash 

Paynients  of  ■subscribers"  for "  their"  "siib-         ^°'°°° '  °° 
scription. 

To  Subscribers.  . 

Being  settlement  for' "capital*  "stock  3o,ooo.oo 

1SSU.6CL. 


n 


m liimiii I I ■liliiiiiiiHiMliiiii 


I  I 


■  I 


Accountancy  Problems  and  Solutions. 

Real  estate. •  •  ■• $90,000.00 

Purchased  this  day  for  speculative  pur- 
poses. 

To  Cash •  •  -. • '■■ 

Part  payment  for  improved  property 

bought  this  day. 

First  mortgage :  •  •  •  : "  • " 

For  balance  of  purchase  price  of  property 
bought  with  6%  interest. 

The  association  organizes  and  incor- 
porates the  Fairview  Club  with  30  pro- 
prietary members  (stockholders  of  the 
Real  Estate  Association)  and  30  associate 
members,  who  have  no  proprietary  in- 
terest, but  enjoy  all  privileges  without 
incurring  any  liabilities.  Annual  dues  to 
be  1 100. 00. 

The  association  leases  to  the  club  their 
property,  for  the  payment  by  the  club  of 
all  taxes,  betterments,  interest,  fixtures, 


30,000.00 


60,000  .00 


Cash 


110,000.00 


60,000.00 


Selling  price  realized  on  the  sale  of  the 
property  of  the  association. 

To  Real  Estate - 

Sale  of  the  improved  property. 

First  mortgage •  •      ■  •  ■  ••- 

Settlement  of  mortgage  issued  at  the  time 
of  purchase  of  real  estate. 

Xo  Cash 

The  pr<3perty  being  sold,  the  mort- 
gage is  now  settled. 

LEDGER 

OP  THE 

FAIRVIEW   REAL  ESTATE  ASSOCIATION. 

Subscribers. 


110,000.00 


60,000.00 


To  capital  stock. . 


$30,000.60       By  cash ^ $30*ooo- 


00 


CAPITAL   STOCK. 


By  subscribers. 
CASH. 


To  subscribers $30,000.00       By  real  estate  . 

Real  estate 1 10.000.00  First  mortgage. 


Balance. 


$140,000.00 


$30,000.00 


$30,000.00 
60,000.00 
50,000.00 

$140,000.00 


Practical  Accounting  Problems, 


REAL  ESTATE. 


To  sundries $90,000.00       By  cash. 

gj^  Income 20,000.00 

$110,000.00 


$110,000.00 


$110,000.00 


FIRST  MORTGAGE. 


To  cash. 


$60,000.00       By  real  estate $60,000.00 


INCOME  AND  REVENUE  ACCOUNT. 


To  surplus $20,000.00       By  real  estate. 


$20,000.00 


SURPLUS. 


Cash. 


By  income  and  revenue 

^^<'omLt $20,000.00 

BALANCE   SHEET. 

$50,000.00       Capital.  ♦,« «« 
(f      , ♦30,000.00 

^^m^s 20,000.00 


$50,000.00 


JOURNAL 

OP   THE 

FAIRVIEW  CLUB. 


$50,000.00 


THE  FAIRVIEW  CLUB 

ORGANIZED    BY    ThE     FaIRVIEW     Rkat     T7c^.^»      a 

PROPRIETARY    MEMBERS      AMn    .  ESTATE     ASSOCIATION     WITH     30 

MEMBERS,    AND    30    ASSOCIATE    MEMBERS.       ANNUAL 
DUES,    $100. 

Cash 

Dues  received  from'  the  60  members  of'ihe 
To  Dues 


$6,000.00 


To  balance $50,000.00 


Real  ptf^fFf^  **?  *^^^^  *^^  property  of  the 
pairs  and  improvements  of  the  association. 


74 


75 


Accountancy  Problems  and  Solutions. 

Members  (indiv.) ■ .- 19,000.00 

For  assessment  of  I300.00  each  propnetary 
member 

To  Assessment 9,000.00 

Assessing  the  30  proprietary  members. 

Cash 7,500.00 

Collected  of  2  5  members  the  assessment  levied. 

To  Members  (indiv.) 7,500.00 

For  cash  assessment  of  $300.00  each,  paid 
by  the  25  proprietary  members. 

Assessments 7fS®*'"*'® 

According  to  a  subsequent  resolution  of  the 
association  the  responded  assessment  is  cred- 
ited to  the  members  individually. 

To  Members "j, $00,00 

Crediting  each  member  individually  with 
the  responded  assessment. 

Cash ■  •         3.00000 

Collected  another  assessment,  levied  upon  the 
proprietary  members. 

To  Assessment 3,000.00 

Proprietary  members  responded  to  a  sec- 
ond assessment  of  $100.00  each. 

Assessment 1,500.00 

To  Members  (indiv.) 1,500.00 

This  entry  to  close  the  accounts  of  the  five 
members  who  failed  to  respond  with  the  first 
assessment  of  $300.00  each. 

Expenses 13,500.00 

Taxes $1,800.00 

Interest  on  mortgage 3,600.00 

Repairs 1,000.00 

Improvements 3,000.00 

Furniture  and  fixtures 2,000.00 

General  expense 500.00 

Help  (employment) 1,600.00 

To  Cash 13,500.00 

LEDGER 

OF  THS 

PAIRVIEW  CLUB. 
Dues. 


To  income . . 


$6,000.00       By  cash $6,000.00 


^ 


Practical  Accounting  Problems, 


CASH. 


To  dues $6,000.00 

Members 7,  coo.oo 

Assessment 3,000.00 

$16,500.00 


By  expense $13,500.00 

Balance 3,000.00 


$16,500.00 


To  balance $3,000.00 

MEMBERS. 


ToAssessment $9,000.00      By  Assessment $7,500.00 

Balance 7,500.00  Cash 7,500.00 

Assessment 1,500.00 


$16,500.00 


$16,500.00 


By  balance $7,500.00 

ASSESSMENT. 


To  members $7,500.00 

Members 1,500.00 

Income 3,000.00 

$12,000.00 


By  members $9, 


Cash 


000.00 


3,000.00 


$12,000.00 


EXPENSE. 


To  sundries $13,500.00      By  revenue $13,500.00 


INCOME  AND  REVENUE  ACCOUNT. 


To  expense $13,500.00 


By  dues $6,000.00 

Assessment 3,000.00 


Loss. 


ti3»5oo.oo 


4,500.00 
$13,500.00 


DEFICIENCY  ACCOUNT. 


To  income  account $4,500.00 

BALANCE  SHEET. 

£*^  .• $3,000.00  Members 

Deficiency 4, 500.00  ^^moers . 

$7,500.00 


77 


$7,500.00 


t7f5oo.oo 


Accountancy  Problems  and  Solutions. 


Problem  20. 

(Following  is  one  of  the  problems  set  by  the  New  York  Municipal 
pvil  Service  Commission  at  the  fourth  grade  accountant  examination  held 
iti  New  York.) 

The  Consolidated  Manufacturing  Company  is  organized  under  the 
laws  of  the  State  of  New  York,  with  a  capital  of  $2,500,000.00,  consisting 
of  10,000  shares  of  preferred,  and  15,000  shares  of  common  stock  all  of  a 
par  value  of  $100.00. 

The  company  has  entered  into  contracts  with  the  firm  of  Jones  & 
Jackson,  and  with  the  Independent  Manufacturing  Company  for  the  pur- 
chase of  their  plants  and  other  assets  in  consideration  of  $1,000,000.00  and 
$1,500,000.00  respectively,  payable  two-fifths  in  preferred  stock  and  three- 
fifths  in  common  stock.  The  liabilities  of  the  vendors  are  to  be  assumed 
by  the  purchaser.  The  vendors  agree  to  donate  to  the  treasury  of  the 
Consolidated  Company  15  per  cent,  of  the  common  stock  received  by  them 
to  furnish  additional  working  capital. 

500  shares  of  the  stock  so  donated  are  sold  from  the  treasury  at  $40.00 
per  share.  $500,000.00  of  first  mortgage  bonds  are  issued  and  sold  at  90, 
the  purchaser  receiving  with  each  bond  a  bonus  of  15  per  cent,  in  common 
ftock. 

Below  are  given  the  balance  sheets  of  the  vendors.  Frame  the  closing 
entries  for  the  books  of  Jones  and  Jackson,  and  the  opening  entries  for 
the  Consolidated  Company,  and  prepare  balance  sheet  for  the  latter. 


7R 


Practical  Accounting  Problems. 


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III 


Accountancy  Problems  and  Solutions. 

Solution. 

Journal  Entries  to  Close  Books  of  Jones  and  Jackson 

Consolidated  Manufacturing  Company $  c  2  7 .000 .  00 

To  real  estate  and  buildings ...  f ....... .        ^^^  $246.000 .  00 

Pl^^t 137,000.00 

Cash 28,000 .  00 

Bills  receivable 76,000 .  00 

Accounts  receivable ^^  000  00 

ff  ,  -  if  J, www.  w 

Horses,  wagons  and  harness 7,000 .  00 

Transfer  of  existing  assets  to  Consoli- 
dated Manufacturing  Company  as  per 
contract. 

Consolidated  Manufacturing  Company ....        513,000 .  00 

To  Goodwill 513,000.00 

Excess  valuation  represented  by 
Goodwill,  transferred  to  Con- 
solidated Manufacturing  Com- 
pany, as  per  contract. 

Billspayable 50.000.00 

To  Consolidated    Manufacturing    Com- 

P^'^y 50,000 .  00 

Assumption  of  existing  liability  on 
outstanding  notes,  by  Consoli- 
dated Manufacturing  Company, 
as  per  contract. 

Preferred  Capital  Stock 400,000 .  00 

Common  Capital  stock 600,000.00 

To  Consolidated    Manufacturing    Com- 
pany    J  000  000  00 

Representing  the  receipts  of  4,000 
shares  of  preferred  capital  stock 
and  6,000  shares  01  common 
capital  stock,  par  value  of  each, 
$100,  from  the  Consolidated 
Manufacturing  Company,  in 
settlement  of  purchase  contract. 

Goodwill 513,000 .  00 

To  Jones'  drawing  account 256,500 .00 

Jackson's  drawing accoimt a56,'5oo.  00 

Representing  the  transfer  of  the 
excess  valuation  placed  on  the 
assets  of  our  firm  by  the  Con- 
solidated Manufacturing  Com- 
pany. 

Tones*  drawing  account 248,500.00 

Jackson's  drawing  account 251,500 .  00 

To  Jones'  capital  account 248,500.00 

Jackson's  capital  account 251  ,'500  00 

Representing  the  transfer  of  the 
drawing  accoimt  to  the  capital 
account  in  order  to  close  the 
former. 

Jones'  capital  account 548,500 .  00 

Jackson's  capital  account 451, '500 .  00 

To  Preferred  capital  stock '  ^oo  000  00 

Common  capital  stock Sooiooo '.  00 

Representing  the  closing  of  the 
capital  accoimt  as  the  stock  is 
issued  to  the  individual  owners 
of  the  business. 

oO 


$1,050,000.00 
1,540,000.00 


Practical  Accounting  Problems. 

Journal  Entries  to  Open  Books  op  Company 

THE  CONSOLIDATED  MANUFACTURING  COMPANY 

Incorporated  Under  the  Laws  of  the 

State  of  New  York  with  an 
AUTHORIZED  CAPITAL 

OF 

$2,500,000.00 

Divided  into 


10,000  shares  of  preferred  stock, 

15,000  shares  of  common  stock, 

par  value,  $100.00  each 

Plant  and  sundry  assets $2,590,000.00 

To  Jones  and  Jackson 

Independent   Manufacturing  Com- 

dany 

For  the  transfer  to  this  company 
by  the  above  mentioned  ven- 
dors their  right,  title  and  in- 
terest in  all  the  assets,  includ- 
ing Goodwill,  fully  set  forth  in 

the  bill  of  sale,  dated 

pursuant  to  the  resolution  of 
the  Board  of  Directors,  re- 
corded in  minute  book,  page . . . 

Tones  and  Jackson 50,000 .  00 

Independent  Manufacturing  Company. ; . .  40,000 .  00 

To  Simdry  liabilities 

Representing  assumption  of  the 
liabilities  of  the  respective 
firms,  mentioned  above,  by  the 
Consolidated  Manufacturing 
Company,  in  part  consideration 
for  assets  acquired. 

Tones  and  Jackson     ....    1,000,000.00 

Independent  Manufacturmg  Company.. . .       1,500,000 .  00 

To  Preferred  capital  stock 

Common  capital  stock ] .  ]  * 

For  4,000  shares  of  preferred 
capital  stock  and  6,000  shares 
of  common  capital  stock  issued 
to  the  firm  of  Jones  and  Jack- 
son and  6,000  shares  of  pre- 
ferred capital  stock  and  9,000 
shares  of  common  capital  stock 
issued  to  the  Independent 
Company  in  final  payment  for 
assets  bought,  as  per  bill  of 
sale  dated 

81 


90,000.00 


1,000,000.00 
1,500,000.00 


■v„: 


II 


[ft 


Accountancy  Problems  and  Solutions. 

Real  estate  and  buildings |6x  j  ,000 .  00 

^v:::. 389.000.00 

Bills  receivable:  ] ." ." .' ." ." .' .' ." .' .' .' .' .' .' .' .'  .* ; .' ;  *  AtTooTa 

Accoimts receivable ."  ic8  ooo  oo 

Horses,  wagons  and  harness 16000  00 

Goodwin J  227 '000 * 00 

To  Hant  and  sundry  assets * 

For  the  purpose  of  placing  the 
respective  assets,  under  appro- 
priate headings,  on  the  books  of 
the  company. 

Sundry  liabilities -,0  -„-  -,., 

To  Bills  payable ]  ] .' ." ;  9o.ooo.oo 

Loans 

For  the  purpose  of  placing 'the 
respective  liabilities,  under  ap- 
propriate headings,  on  the 
DOOKS  of  the  company. 

Treaswy stock 150,000.00 

To  Reserve  for  Working  Capital 

Representing  1,500  shares  of 
common  capital  stock  donated 
to  the  company  by  the  stock- 
holders. 

S^®^-  *  - ;  •. ao.ooo.oo 

Reserve  for  workmg  capital ,0,000  00 

To  Treasury  stock jo.ooo.oo 

Representing  the  sale  of  500 
shares  of  common  capital 
stock  held  in  the  treasury  at 
I40.00  per  share. 

Cash 

Discoiiiit  oA  bonds.: :  .* : : : : : : : : : : : *?o  ooo  oo 

Reserve  for  working  capital ; ;  ^5,000  ;oo 

To  First  mortgage  bonds  payable 

Treasury  stock 

Representing  the  issue"  and  sale 
of  $500,000.00,  first  mortgage 
bonds  at  90,  and  also  the  issue 
of  750  shares  of  common  stock, 
held  in  the  treasury,  as  a  bonus 
on  the  sale  of  the  bonds. 


82 


$2,590,000.00 


50.000 .  00 
40,000.00 


150,000.00 


50,000.00 


500,000.00 
75,000.00 


Practical  Accounting  Problems. 


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.28 


Accountancy  Problems  and  Solutions. 

Probleni  21. 
(Ohio  Examination.  March,  1910.) 

You  have  made  an  audit  of  the  books  of  The  Alpha  Water  Company 
of  Delta,  under  instructions  from  The  Zed  Trust  Company. 

They  expect  you  not  only  to  make  an  audit  and  furnish  them  with  the 
usual  report  thereon,  but  ask  you  to  make  a  thorough  examination  of  the 
business,  and  make  such  criticisms,  and  call  their  attention  to  such  facts, 
as  will  enable  them  to  determine  their  policy  in  reference  to  their  loan. 

The  following  is  a  trial  balance  from  the  general  ledger  of  the  company: 

Trial  Balance  of  The  Alpha  Water  Company,  December  31,  1909- 

Plant,  Franchises,  etc $970,000.00 

Consolidated  Mortgage  Bonds  in  Escrow  to  re- 
tire prior  issue 205,000.00 

Bonds  pledged  with  The  Zed  Trust  Co.,  as 

collateral  for  loan 250,000.00 

Cash— Last  days  collection  not  deposited 300.00 

Petty  Cash  Fund 100.00 

Cash  in  Bank 8,200.00 

Controlling  Accounts  Receivable: 

Meter  Rate  Ledger  Accounts  in  Dr.  $5,000.00 

Meter  Rate  Ledger  Accounts  in  Cr.       500.00 

4,500.00 

Flat  Rate  Ledger  Accounts  in  Dr.       100.00 

Flat  Rate  Ledger  Accounts  in  Cr.       150.00 

$50.00 

Inventory  Account 3,100.00 

Personal  Account— A 500.00 

Personal  Account— B 2,000.00 

Controlling  Accounts  Receivable: 

Meter  Sales  Ledger 200.00 

Meter  Repairs  Ledger 5000 

Miscellaneous  Accounts  Receivable 60.00 

Prepaid  Insurance 100.00 

Meter  Rate  Earnings— Accrued 3,000.00 

Flat  Rate  Earnings— Prepaid 1,500.00 

Mortgage  Bonds: 

Consolidated  Mortgage  Bonds...  $500,000.00 

Prior  Mortgage  Bonds 205,000.00 

■  705,000.00 

Guarantee  Deposits— to  guarantee  meter  bills. .  800.00 

Bills  Payable — as  per  schedule 210,000.00 

Accounts  Payable 20,500.00 

Profit  and  Loss  Account— Surplus  at  January 

I,  1909 3,000.00 

84 


Practical  Accounting  Problems, 

Capital  Stock 

Bond  Interest  Accrued 

Unpaid  Payroll 

Interest  Accrued  on  Bills  Payable 

Taxes  Accrued 

Construction  Account 2,000.00 

Land  Rental  Accrued 200.00 

Meter  Account — Profit  from  sale  of  meters 

Meter  Repairs — Profit 

Discounts — Taken - . 

Hydrant   Rental 

Meter   Rate   Earnings 

Flat  Rate  Earnings  

Miscellaneous 

Interest  on  Bonds 12,500.00 

Interest  on  Bills   Payable 12,600.00 

Insurance    150.00 

Wages — Pumping  Station 6,500.00 

Fuel 12,000.00 

Repairs  to  Machinery 1,300.00 

Oil  Packing  and  Waste 150.00 

Repairs  to  Buildings 100.00 

Repairs  to  Tools 150.00 

Miscellaneous  Pump  House  Expense 600.00 

Repairs — Water  Supply 250.00 

Repairs — Pipe  System 1,650.00 

Office  Expense 1,300.00 

Office  Rent 600.00 

Salaries  of  Management 7,000.00 

Stationery,  Printing  and  Postage 250.00 

Stable  Expense 300.00 

Miscellaneous  Expense 1,150.00 

Maintenance  and  Operation  of  Filtration  Plant         3,500.00 

Maintenance  and  Operation  of  Stand  Pipe 100.00 

Taxes  5,000.00 

$1,5 15*960.00 

Schedule  of  Bills  Payable. 
The  Zed  Trust  Co $190,000.00 

Demand  note  at  6%  interest 
The  Delta  National  Bank 10,000.00 

Note  due  February  i,  1910 $5,000 

Note  due  March  i,  1910 5,000 

Both  for  four  months  at  6% 
The  National  Filtration  Construction  Co 10,000.00 

Note  for  one  year — due  March  i,  1910,  at  6% 

$210,000.00 
85 


500,000.00 

1,000.00 

500.00 

900.00 

2,500.00 


I,200.0C» 
90.00 
20.00 

8,000.00 
50,000.00 

9,400.00 

1,000.00 


•IM 


$1,5 15*960.00 


Accountancy  Problems  and  Solutions. 


Practical  Accounting  Problems. 


The  company  furnishes  water  to  consumers  on  meter  connections  which 
are  payable  on  readings  at  the  end  of  every  three  months;  also  to  other 
customers  at  flat  rates  payable  in  advance  every  six  months. 

The  company  buys  meters  and  sells  to  users  at  some  increase  over  cost. 

The  company  keeps  meters  in  repair  and  makes  repair  charges  to  con- 
sumers. 

The  company,  under  its  franchise,  furnishes  free  water  for  all  municipal 
and  charitable  purposes,  except  a  fixed  rental  per  annum  for  each  fire 
hydrant,  for  which  the  city  pays. 

The  franchise  provides  that  when  the  annual  gross  earnings  from  water 
shall  equal  $65,000  the  company  shall  pay  into  the  treasury  of  the  city  one 
per  cent,  of  such  gross  earnings.    No  such  pa3rment  has  been  provided  for. 

Your  audit  has  revealed  the  fact  that  water  rates  accrued  are  greater  by 
$2,000.00  than  shown  on  the  books,  as  per  the  above  trial  balance. 

You  have  also  found,  not  set  up  on  the  books,  current  unaudited  invoices 
payable  chargeable  to  the  year  1909,  as  follows: 

Chargeable  to  Construction    $1,000.00 

Machinery  Repairs 150.00 

Fuel    , , 300.00 

Total   — $1,450.00 

You  have,  in  the  course  of  your  examination  figured  the  duty  on  the 
pumping  engines,  and  have  found  that  as  compared  with  the  average  well 
equipped  plant  such  engines  have  only  50%  of  the  efficiency  of  the  more 
modem  pumping  engines. 

Prepare  a  balance  sheet  in  detail  and  a  condensed  balance  sheet. 

Prepare  an  income  and  expense  account  in  detail  and  a  condensed 
income  account. 

Indicate  as  well  any  supporting  schedules  you  would  make  supporting  the 
balance  sheet  or  income  account. 

Cover  in  your  report  such  matters,  under  the  instruction  from  your 
clients,  to  which  you  deem  their  special  attention  should  be  directed,  and 
make  such  suggestions  to  them  as  your  examination  would  warrant,  giving 
good  reasons  for  any  criticism  or  suggestions  you  may  have  to  make. 


CIwjP 


Solution. 

BALANCE  SHEET 

The  Alpha  Water  Company  of  Delta 

(December  31,  1909) 
Assets  : 
Cost   of   Property— Plant,   Fran- 
chise : 

Book  Value,  January  i,  1909 $970,000.00 

New    Construction    during    the 

year— Schedule  3,000.00  $973,000.00 

Bonds : 
Bonds  Alpha  Water  Co. — Held 

in  Escrow   205,000.00 

Bonds      Alpha     Water      Co. — 

Pledged  as  Collateral 250,000.00    455.0QOOO  $1,428,000.00 

Cash: 

In  Bank   8,200.00 

Petty  Cash  Fund 100.00 

On  Hand  for  Deposit 300.00       8,600.00 

Accounts  Receivable: 

Meter  Rate  Ledger 5,000.00 

Flat  Rate  Ledger  100.00 

Meter  Sales  Ledger  200.00 

Meter  Repairs  Ledger SO. 00 

Miscellaneous  Accounts  Receiv- 
able    60.00 

Personal    Account    B    2,000.00       7,410.00 

Accrued  Accounts  Receivable: 

Meter  Rates  Accrued 5,000.00 

Land  Rent  Accrued 200.00        5,200.00 

Unexpired  Insurance 100.00 

Inventory— Schedule  3,100.00        24410.00 

Total  Working  Assets $1,452,410.00 

Liabilities  :  ^ 

Capital   Stock    $500,000.00 

Mortgage        Debt  —  Consolidated 
Mortgage : 

S°"*^%:-: ••••• $500,000.00 

Prior  Mortgage  Bonds 205,000.00    705,000.00 

Total  Capital  &  Mortgage  Debt  $1,205,000.00 

Bills  PAYABLE-Schedule 210,000.00 

Accounts  Payable: 

Unpaid  vouchers— Schedule 21,950.00 

Meter  Rate  Ledger— Cr.  Balances  500  00 

Flat  Rate  Ledger— Cr.  Balances.  15000 

Unpaid  Pay  Rolls  500  00 

Personal  Account — A 500  00 

City  of  Delta-i%  franchise  tax  694.'oo      24,294.00 

87 


Accountancy  Problems  and  Solutions. 

AcciUED  Accounts  : 

Bond  Interest  Accrued  1,000.00 

Interest  Accrued  Bills  Payable  .  900.00 

Taxes  Accrued 2,500.00       4AOO.00 

Prepaid  Water  Bills— Flat  Rate 

Ledger 1,500.00 

Guaranteed  Deposits oQQ. 00 

Total  Working  Liabilities 

Surplus  


240,994.00 
6410.00 


$1,452410.00 


CONDENSED  BALANCE   SHEET 
The  Alpha  Water  Company  of  Delta 
(December  31,  1909) 

Assets  : 
Total  Invested  and  Deferred  Assets : 
Excluding    Bonds    Pledged    and    Held    in 

Escrow   $973,000.00 

Total  working  assets 24,410.00  $997410.00 

Liabilities  : 

Capital  Stock 500.000.00 

Bonds— Prior  Issues  $205,000.00 

Bonds— Consolidated  Mortgage 500,000.00 

705,000.00 
Less— Bonds  Pledged...  $250,000.00 

Bonds  in  Escrow.    205,000.00    455»ooo.oo    250,000.00 

Total  Capital  &  Mortgage  Debt 750,000.00 

Total  working  liabilities  240,99400    990,994.00 

Surplus   $6416.00 


INCOME  ACCOUNT 

The  Alpha  Water  Company  of  Delta 

(For  year  ending  December  31,  1909) 

Income  : 

From  Sale  of  Water— Meter  Rates $52,000.00 

From  Sale  of  Water— Flat  Rates 9,400.00 

From  Sale  of  Water— Fire  Hydrants..  8,000.00  $69,400.00 

Meter  Sales 1,200.00 

Meter  Repairs 90.00 

Discounts  Taken  20.00 

Miscellaneous  Earnings  (as  per  schedule)   1,000.00 

Gross  Earnings 

88 


$71,710.00 


Practical  Accounting  Problems. 

Expenses  : 
Operation — Pumping  Station : 

Wages   $6,500.00 

^uel  .•••;••..; 12,300.00 

Repairs  to  Machinery 1450.00 

Repairs  to  Buildings  100.00 

Repairs  to  Tools  150  00 

Oil  Waste  &  Packing isoloo 

Misc.  Fump  House  Expense.       600.00    21,250.00 

Repairs  Pipe  System i  6co  00 

Repairs  Water  Supply 2^0  w 

Operation  &  Maintenance  Filtration  Plant'!;;;  3.500' 00 

Maintenance  of  Stand  Pipe loo'oo 

Stable  Expense ;;;;:         300.00    27,050.00 

General  Expenses: 

Office  Expense 1  onn  n^ 

OfficeRent 6^^^ 

Salaries  of  Management .[.'. 7mn'nn 

Stationery,  Printing  &  Postage ; ; ; '  "  ^'2^0*00 

Miscellaneous  Expense-Schedule  ;  ./sp]^    ,0.300.00 

TaxeT?.^.  '''':';^'  ^^^"^^   •  V, 00000  ^^^^^ 

Insurance ;; ^^'?^'^ 

^50. 00  5.150.00 

Total  Operation,  Taxes,  Insurance. .  ~  ^2,500, 00 

Net    Earnings    from    Operation ~   ,,^  ^ 

Interest  on  Funded  Debt  . .   i.  cnn  no    ^^^^^'^ 

Interest  on  Unfunded  Debt   ; ; iJfiSS'^ 

I  per  cent  Franchise  Tax 'fi^SS    oe^o. 

094.00    25,794.00 

Net  Income  for  1909  ""  ~ — 

Surplus-Forwarded  jknuai^  i',' igi^".:::::: '.  It^'^ 

^'Sheet""^^""'^^'"  ^'*  '^'  ^'  P^*"  ^^^^"*^^  ~^ '~~ 

$6,416.00 

Note  :-No  provision  made  for  depreciation.  ' 

CONDENSED   INCOME  ACCOUNT 
The  Alpha  Water  Company 
Income:  d^ecember  3,,  1909) 

Earnings  from  Sales  of  Water  *<^. 

Earnings  from  Other  Sources    $09400.00 

2,310.00 

Gross  Earnings   .  

Expenses.  $71,710.00 

Total  Operating  Expenses,  Taxes  &  Insurance. ...  ^  ,00  00 

Net  Earnings  from  Operation  ^'^      "^ 

Interest  on  Funded  Debt                    29,210.00 

Interest  on  Unfunded  Debt  12,500.00 

I  per  cent  Franchise  Tax  .    12,600.00 

694.00    25,794.00 

Net   Income    ^ — — 

$3»4i6.oo 

89  ~~ 





Accountancy  Problems  and  Solutions. 


Practical  Accounting  Problems. 


II 
■1' 


Problem  22. 
(Illinois  Examination.  May.  1910.) 

A.  B  and  C  engage  in  business,  A  contributing  $io.ooo  capital;  B 
$5,000,  and  C  undertakes  to  take  the  active  management  at  a  salary  oi 
$3  000  a  year,  to  be  paid  to  him  monthly.  After  providing  5  per  cen 
Serest  on  capital  they  are  to  divide  the  net  results  m  the  proP~s 
of  s.  3.  and  2.  At  the  end  of  i8  months  they  ascertam  the  position  to 
be  unfavorable  and  decide  to  wind  up.  The  assets  are  ^g^^ed  to  be 
worth  $12,500.  of  which  A  takes  $io,ooo.  and  B  $2,500.  There  are  no 
liabilities  except  for  the  capital  and  simple  interest  thereon,  and  one 
month's  salary  due  C  State  the  position  of  the  three  partners  to  each 
other. 

Solutioii. 

Ascertainment  of  profit  or  loss  for  the  period,  before  charging  interest  00 

capital 

Joint  Capital  Account  of  A,  B,  and  C 


To  capital  at  end $12,500.00 

"  C, cash, salary  17 mos.      4,250.00 

$16,750.00 


I 


By  capital  at  beginning .  $1 5tOOO .  00 
•'  profit  for  period 1,750.00 

$16,750.00 


Profit  and  Loss  Account  at  End  of  Period 


To  Partners'  Interest: 
A- 5%;if  ^os.  on 
$10,000 #750 

B,  5%  18  mos.  on 

$5,000 J75  $1,125.00 

C,  salary  for  18  mos 4,500.00 

$5,625.00 

To  balance  fVd I3.87500 


By  profits $i,750.oo 

•'  balance,  net  loss 3»875-00 


$3,875.00 


$5.625.00 

By  Division  of  Net  Loss: 

A's  share,  5-10 $1, 937 -50 

B*s share,  3-10 1,162.50 

C's  share,  2-10 775- 00 

$3.87500 


A's  Capital  Account 


To  assets  taken  over.  . . .  $10,000.00 
"  loss,  5-10  shares 1.937- 50 


$".937  50 


To  balance $1,187.50 


By  investment $10,000.00 

"  interest,  5% 750.00 

balance 1. 187. 50 

$".937.50 


B's  Capital  Account 


To  assets  taken  over ....     $2,500 .  00 

"  loss,  3-10  shares 1,162.50 

"balance 1,712.50 

$5,375.00 


By  investment $5,000.00 

"  interest,  5% 375-00 


$5,375-00 


By  balance $1,712.50 


C's  Capital  Account 


To  salary  paid,  17  mos , 
"  loss,  2-10  share ... 


,250.00 
775  00 


$5,025.00 


To  balance $525.00 


%  salary,  18  mos $4,500.00 


balance 


525-00 


$5,025.00 


90 


91 


Accounmncy  Problems  and  Solutions, 
Problem  23. 

(New  York  Examination.  June,  1910.) 

^     it^  romt>anv  was   organized   January  i.  1906.  to 
Tlie   Homes   Realty  Company   wa        s  manager  under  an 

„  Jld  seU  suburban  lots.  «nd  .s  operated  by  a  m       g 
.g^ent  of  which  the  foUow.ng  .s  a  digest.  ^^^^  ^^^  ^^ 

The  company  is  to  furnish  and  "^^int^"  Xrbs  of  Philadelphia,  and 
the^Ue  ?f  ^t'ir^^rW^^rX^^     ^Ti^anager  is  to  rece.ve  3% 
also  to  pay  salaries  ot  cierKs^auu 
conunission  on  the  sales.  beginning  of  each  year   by 

The  property  is  to  l^^^^^^P^^^bl^SV^re  of  the  property  unsold  at 
addine  to  the  account  4%  o"  *"®  "i  jli%v  adding  the  amount  of  any 
ttfbL^ning  of  the  P'^'^^drng  year   and  by  aaai  g  additions  for 

{^^f Sch  U  ,b-f„-ts™t  yea&T^el  Le  made  up  by  profit, 
losses  to  be  can^lf^.'^^r^  pirated  over  the  reraainmg  Jots  for  sale^ 
1^1  fhrman^geffslt^n^JtC^U  any  property  at  less  than  the  book 

lijjure* 

The  books  have  been  kept  for  two  y^  t^^f^^^^^^t^T^V 
entries  and  the  accounts  show  the  foUowmg  figures 

Property  account  (originalpurchasesof  ..000  lots  of  equal 

value) 

Capital  stock « 

New  York  office  expense 

Philadelphia  office  expense ••■■•■ 

Salesmen's  salaries inA^S-^^ 

Sales  220  lots  for ^'    'a  '  215 .00 

Deposits  on  account  of  sales  not  yet  closea -  ■  •  •  ^^^^^^  ^^ 

Mortgage  held  on  property  sold ■      • 49,096 .43 

Cash '' f    \  .    .  ^4^3  ■  75 

^tors'  accounts  (for  office  supplies) ^  ^^^^ 

Interest  on  mortgages  received 

There  is  »!«>  an  amount  of  ^"^^::^T$J^CTl^^^' 
and  $»35.oo  «=^ed  interest  on  mortgages  at  Decemo     3 

and  sales  appear  up  to  December  31.  '9o6: 


$400,000  .  00 

400,000  .  00 

3,085.00 

5,178.3a 
17.500°** 


These  figures  for  expenses 


1,435.00 
3,647.82 

8,500.00 

39,000.00 


New  York  office  expense 

Philadelphia  office  expense ....*.*... 

Salaries  of  salesmen 

Sales,  60  lots  for 

.  detailed  exhibit  of  operations,  also  balance  sheet  as  at  the 


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Accountancy 


Problems  and  Solutions. 


Practical  Accounting  Problems. 


i  i 


Homes  Realty  Company 

Exhibit  C 

Balance  Sheet  January  j,  iqo8 


Assets 

Cash  on  hand  and  in  bank $491096.43 

Mortgage  receivable 38,000.00 

Interest  "  Due $125 .00 

Accrued 235.00  360.00 

Property  account,  as  per  Exhibit  B $343,623 .47 

Less  reserve  for  earnings  on  investment 31,623.47  312,000.00 

Total  assets l399>456.43 

Deficit 4,745.07 

$404,201.50 


Liabilities 

Accounts  payable $643 .  75 

"             "       (manager) 3.342-75 

Deposits  on  sales 215.00 

Total $4,201 .  50 

Capital  Stock 

Authorized  issue (|  \ 

Issued  and  outstanding 400,000.00 

$404,201.50 


P*    CD 


oo 


95 


94 


I     ll 


Accountancy  Problems  and  Solutions. 

Problem  24. 

(New  York  Examination.  June,  1910.) 

The  trial  balance  of  the  Vincent  Manufacturing  Company  as  of 
December  31,  1906,  is  given  below.  Inventory  December  31,  1906, 
$90,000.00. 

Prepare  a  statement  of  profit  and  loss  and  income,  showing  (a)  cost 

of  manufacture,  (b)  cost  of  selling,  (c)  cost  of  administration,  (d)  net 
profit  (e)  surplus. 

TRIAL  BALANCE 

Discounts,   trade    $4,030.00 

Entertainment   of   customers 2,000.00 

Machinery  inventory  December  31,  1906. . .  40,000.00 

Tools,  inventory  December  31,  1906 8,500.00 

Patents  inventory  December  31,  1906 21,000.00 

Patterns  inventory  December  31,  1906 12400.00 

Merchandise   consumed    • 410,000.00 

Bills  receivable    3,050.00 

Accounts  receivable 250,000.00 

Insurance : 

Machinery,  tools  and  patterns 500.00 

Merchandise 650 .00 

Employer's  liability  premiums 4,000.00 

Taxes,  personal  property • 1,000.00 

Interest,  general    4,470.00 

Cash 45,000.00 

Labor,   productive    300,000.00 

Labor,  unproductive 35,000.00 

Power    21,000.00 

Repairs,  machinery 1,310.00 

Factory  expenses    3,010.00 

Office  pay  roll 18,000.00 

Inventory  January  1,   1906 75,000.00 

Merchandise   sales    $1,048,500.00 

Allowances    10,900.00 

Office  furniture  and  fixtures 5,700.00 

Salaries,  officers*  15,000.00 

Postage    2,000 .00 

Telegrams  and  telephones 1,800.00 

Collection  and  exchange 700.00 

Stationery  and  printing 3.050.00 

Freight,  in   23,000.00 

Freight,  out 10,000.00 

Cartage  and  express,  in 3,75O.0O 

Bonding  of  employees   (office) 250.00 

Traveling  expense    (salesmen) 17,500.00 

Salesmen's  commission  and  salaries 40,000.00 

96 


Practical  Accounting  Problems. 

Bills  payable $99i050-oo 

Accounts  payable 43.000.00 

Surplus 43.520.00 

Capital  stock 200,000 . 00 

Directors'  fees $1,500 .  00 

Cartage,  out 4,300 .  00 

Discounts,  trade 6,300 .  00 

Return  sales  account 41,000.00 

$1,440,3 70 •  00    $1,440.370  00 

Solution. 

The  Vincent  Manufacturing  Company 

Income  and  Profit  and  Loss  Statement  for  the  Period  Ending  December  31, 

1906 

Gross  sales $1,048,500.00 

Less  return  sales 41,000.00  $1,007,500.00 

Deductions  from  sales: 

Trade  discounts $4,030.00 

Allowances 10,900.00 

Cartage  outward 4,300.00 

Freight 10,000.00 

Total  deductions  from  sales 29,230.00 

Amount  realized  from  sales $978,270.00 

Cost  of  Manufacture: 
Prime  Cost: 

Raw  material  consumed $410,000.00 

Freight  inward 23,000.00 

Cartage  and  express  inward 3,750.00 

Gross  cost  of  materials $436,750.00 

Less  increase  in  inventory: 

Inventory,  i2/3i/'o6 $90,000.00 

i/i/'o6 75,000.00 

T,     ,     ,.  ^  $15,000.00 

Trade  discounts 6,300.00  21,300.00 

Cost  of  materials ^atc  akh  no 

Productive  labor i:.:::;:  i^:^;S 

Total  prime  cost €7, e  AZn  nn 

Factory  overhead  charges:  *7i5.450.oo 

Unproductive  labor $35,000.00 

Power 21,000.00 

Factory  expenses 3,010.00 

Repairs  to  machinery 1,310.00 

Total  factory  overhead  charges 60,320 .  00 

Cost  of  production --'-^^75J70^ 

Gross  profit  on  sales ;     ^202,500.00 

Cost  of  Sales: 

Salesmen's  commissions  and  salaries . . .  $40  000  00 

"  traveling  expenses ["  17 'coo  00 

Entertainment  of  customers .'  a.'Soo.'oo         59.500.oo 

Selling  profit "li^i^;^^^ 

97 


fill 
I 


I  f 


11! 


I    I 


I        1*1 


' 


Accountancy  Problems  and  Solutions, 

Cost  of  AdministraHon: 

Officers'  salaries  . fj  b  ooo  oo 

Tvil!r  jI/V 18,000.00 

Telegrams  and  telephones 1,800.00 

S«?i^® i   ■  •  L 2,'ooo.oo 

IXMlection  and  exchange ^qo  00 

Stationery  and  printing " '  ,  oso  00 

Bonding  of  employees,  office 2?o  00 

Director's  fees ;;  i.gSoioo 

Total  administration  expenses. ~       $42,300.00 

Income  from  sales i7nft  «MVrt  ^ 

Owiges  against  income:  ^loo./oo.oo 

Insurance: 
Machinery,  tools  and  patterns. . .  I500 .  00 

E,^W^v1!fK;i- ; • ^50.00  I1.150.00 

ISmployer  s  hability  premiums 4  000  00 

Interest,  general T  a-jo  no 

Taxes,  personal ;;;;;;;  tioo.'oo 

Total  charges  against  income ]  ]         ,0  620.00 

Mm  Profit «II~fl 

Surplus  January  1. 1*9^6;;: .'.'.*.'.*:::;:;::;:::;;;::    i^i^o.^ 

Sm^m  January  j,  igof I133.600.00 


Practical  Accounting  Problems. 


*^ 


The  Vincent  Manufacturing  Company 
Balance  Sheet,  December  31,  1906 
Assets 
Machinery,  at  inventory  value $40,000.00 

Patents  "  "  *•       0,500.00 

Patterns,      "         "  *'     ;•;•*•      is^w 

Office  furniture  and  fixtures,  at  inventory  value ,. ...       5,700 .  00  $87,600  00 

iitxounis 250,000   253,050.00 

Cash  on  hand  and  in  bank 45,000.00  xSS  oso  00 

^475.650.00 

Liabilities  m^^^m^mmmm 

Notes  payable «qq  ocn  nn 

Accounts   "  »99.050.oo 

™^ " 43.000. oo$i42,o5o. 00 

Capital  and  Surplus 

Capital  stock,  issued  and  outstanding $200  000  00 

Surplus  as  per  statement  of  profit  and  loss i33',6oo'.oo   333,600.00 

I475.650.00 

98 


Problem  25. 

(New  York  Examination,  June,  1910.) 

A  partnership  was  formed  July  i,  1907  to  act  as  factory  selling 
agents,  with  capital  invested  by  A,  $5,000.00;  B,  $7,000.00;  C,  $8,000.00; 
profits  and  losses  to  be  shared  in  proportion  to  original  capital  invest- 
ments, no  interest  to  enter  into  partners'  accounts. 

On  December  31,  1909,  the  books,  which  had  been  badly  kept,  showed 
the  following  balances,  which  were  not  disputed  by  any  of  the  partners: 
A,  net  credit,  $3,000.00;  B,  net  debit,  $3,370.00;  C,  net  credit,  $4,650.00; 
cash  in  banks  and  on  hand,  $804.30;  expense  debit,  $4,550.00;  interest 
credit,  $250.00;  accounts  receivable,  factories,  $2,240.00;  investment 
account,  $12,000.00. 

The  firm  holds  a  number  of  one  year  sales  contracts,  under  which 
the  minimum  guaranteed  will  net  $15,000.00  in  commissions,  although 
it  is  believed  that  the  amount  may  nm  to  $20,000.00.  The  factories 
make  shipments  to  customers  direct  and  send  monthly  statements  to 
A,  B  and  C  of  shipments  and  commissions.  The  investment  accoimt 
represents  holdings  at  par  of  75%  of  the  capital  stock  of  a  company  on 
whose  books  at  the  end  of  1909  appears  a  deficit  of  $2,700.00. 

A  and  B  have  agreed  to  sell  their  interest  in  the  business  at  Decem- 
ber 31,  1909,  including  the  firm  name,  to  C  for  200  cents  on  the  dollar, 
taking  notes  covering  eighteen  months. 

Prepare  a  statement  showing  the  settlement  between  partners  at 
December  31,  1909,  and  a  balance  sheet  as  at  January  i,  1910,  of  A, 
B  and  C. 


99 


Accountancy  Problems  and  Solutions. 


8 


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Practical  Accounting  Problems. 


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Accountancy  Problems  and  Solutions. 


Problem  26. 

(New  York  Examination,  June,  1910.) 

Tlie  Patent  Specialty  Company  was  oi^ganized  July  i,  1907,  with 
a  capital  of  $100,000.00,  to  manufacture  novelties.  The  following 
transactions  occurred: 

July  I,  1907,  one-half  of  capital  stock  was  subscribed  and  issued, 
10%  being  called  and  paid  on  that  date  in  cash.  Legal  and  other 
incorporation  expenses,  amounting  to  $500.00,  were  paid. 

August  20,  1907,  patent,  covering  novelty,  was  purchased  for 
$50,000.00,  payable  one-half  in  stock  and  one-half  in  cash;  the  stock 
was  issued  and  delivered,  $2,000.00  paid  in  cash  and  note  given  for  bal- 
ance, due  in  one  month,  6%  interest.  The  patent  was  subject  to  royalty 
rights,  granted  to  the  Novelty  Company,  which  terminated  at  date  of 
purchase.  All  accrued  royalties  were  to  pass  with  patent  and  no  royalty 
rights  were  granted  by  the  Patent  Specialty  Company. 

August  27,  1907,  the  Village  Board  of  Trade  donated  a  lot,  valued 
at  $5,000.00,  in  consideration  of  agreement  to  erect  and  equip  a  plant 
at  cost  of  not  less  than  $25,000.00. 

September  13,  1907,  a  further  call  of  70%  was  paid.  The  note  was 
paid  at  maturity. 

December  31,  1907,  the  following  facts  existed: 

Pa3nnents  on  account  of  salaries,  interest,  insurance,  etc.,  amoimted 
to,  $2,250.00,  with  $250.00  accrued;  contracts  for  construction  and 
equipment  amounting  to  $35,000.00  had  been  given,  which  were  75% 
completed  and  40%  paid;  royalties  amoimting  to  $2,725.00  had  been 
received  and  $190.00  was  accrued. 

'    1  Prepare  journal  entries  to  cover  foregoing  and  statement  to  display 
financial  condition  at  December  31,  1907. 


Practical  Accounting  Problems. 


Solution. 

The  Patent  Specialty  Co.— Journal  Entries 

July  I,  1907 

The  Patent  Specialty  Co.,  incorporated  under  the 
laws  of  the  State  of  New  York,  with  an  author- 
ized capital   of    One  hundred  thousand   dollars 

($100,000),  divided  into shares  of  the  par 

value  of dollars  ($ ),  each. 

Date  of  incorporation 1907 

Date  of  organization July  i,  1907 

Subscription,  Dr.    $50,000.00 

To  Subscribed  Capital  Stock,    Cr. 

Cash,  Dr.        5,000.00 

To   Subscription,  Cr. 

shares   of    the    capital    Stock   subscribed   to 

per  subscription   list   accepted  by  the   directors 

vide  minute  no for  which  certificates  have 

been   issued,   and    10%    of    amount    subscribed, 
called  and  paid. 

Organization  expenses,  Dr.  500.00 

To  Cash,  Cr. 

Legal,  and  other  incorporation  expenses  paid. 


August  20,  1907 


Patent, 


Dr. 

To  Vendor,  Cr. 

For  patent  covering  novelty  purchased  by  the  di- 
rectors in  accordance  with  the  terms  of  Bill  of 

Sale  dated and  entered  on  minute  book,  vide 

minute  no 

Vendor,  Dr. 

To  Subscribed  Capital  Stock,    Cr. 
"   Cash, 
"   Note  Payable, 

In  settlement  of  amount  due  him  on  account  of 
purchase  of  above  patent  there  have  been  issued 

to  him shares  of  the  capital  stock  of  this 

company,  full  paid  and  non-assessable.  Cash  to 
the  amount  of  $2,000  has  also  been  paid  him 
and  a  note  for  $23,000  payable  in  one  month  from 
date  hereof,  and  bearing  interest  at  6%  per  an- 
num has  been  executed  and  delivered. 

103 


$50,000.00 


5,000.00 


500.00 


50,000.00 


50,000.00 


50,000.00 


25,000.00 

2,000.00 

23,000.00 


> 


Accountancy  Problems  and  Solutions. 


Real  Estate, 


August  27,  1907 

Dr. 

To  Surplus,  Cr. 

Value  of  lot  donated  by  the  Village  Board  of 
Trade  in  consideration  of  agreement  to  erect 
and  equip  a  plant  at  cost  of  not  less  than  $25,000 
which  agreement  has  been  executed  by  the  direc- 
tors and  deed  delivered. 

September  13,  1907 

Cash,  Dr. 

To  Subscription,  Cr. 

In  payment  of  a  call  of  70%  of  amount  subscribed 

made  by  the  directors  vide  minute  no 


Dr. 


September  20,  1907 

Note  Payable, 
Interest  on  Note, 

To  Cash,  Cr. 

In  payment  of  Note  issued  August  20,  1907,  with 
interest  at  6%  per  annum. 

December  31,  1907 

Plant  Construction,  Dr. 

To  Contractors,  Cr. 

For  70%  of  contract  price,  $35,000,  of  plant  and 

equipment   to  be    erected,    which  proportion   is 

complete. 

Cash,  Dr. 

Royalties  accrued,  ** 

To  Royalties,  Cr. 
Royalties  received  and  accrued. 

Contractors,  Dr. 

Sundry  expenses,  ** 

To  Cash,  Cr. 
Payments  to  contractors,  and  for  salaries,  interest, 

and  insurance,  etc. 

Sundry  expenses,  Dr. 

To  Accrued  Expenses,  Cr. 

Salaries,  interest,  insurance,  etc.,  accrued  but  not 

paid. 

Patent,  Dr. 

To  Interest  on  Note,  Cr. 
Interest  paid  on  note  dated  August  20,  1907,  added 

to  purchase  price. 

Royalties,  Br. 

To  Patent,  Cr. 


$5,000.00 


35,000.00 


23,000.00 
115.00 


26,250.00 


2,725.00 
190.00 


14,000.00 
2,250.00 


250.00 


115.00 


2,915.00 


$5,000.00 


35,000.00 


23,115.00 


26,250.00 


2,915.00 


16,250.00 


25000 


115.00 


2,915.00 


I 


■ 


Practical  Accounting  Problems. 

Royalties  accrued   on   Patent   purchased   deducted 

from  purchase  price. 
Organization  expenses,  Dr.      $2,500.00 

To  Sundry  Expenses.  Cr.  $2,500.00 

Interest,  insurance,  salaries,  etc.,  incurred  to  date. 

The  Patent  Specialty  Co.— Balance  Sheet,  December  31,  1907 

ASSETS 

Real  Estate $5,000.00 

Plant  Construction,  value  of  work  completed  (75%  of  contract 

price ) 26,250.00 

Patent 47,200.00 

Organization  Expenses 3,000.00 

Cash  on  hand  and  in  bank 860.00 

Royalties  accrued 190.00 

$82,500.00 

LIABILITIES  — ^— — ■ 

Sundry  accrued  expenses,  salaries,  insurance,  etc $250.00 

Contractors,  amount  due  them 12,250.00 

-,    .  $12,500.00 

Capital  Stock,  authorized $100,000.00 

Less  Stock  unissued 25,000.00 

Subscribed  Capital 75,000.00 

Less  amount  uncalled 10,000.00 

Outstanding  Stock 65,000.00 

Surplus 5,000.00 

$82,500.00 


105 


Accountancy  Problems  and  Solutions. 
Problem  27. 


(New  York  Examination,  June.  1910.) 

There  were  purchased  December  31,  1907.  $100,000  of  Brownsville 
4i's  for  $103,39443  ex.  interest. 

On  June  30,  1909,  half  of  the  bonds  were   sold  for  $52418.55  «. 

interest. 

Given  that  the  bonds  are  semi-annual  and  that  the  price  paid  is  such  as 
to  net  the  investor  the  nominal  rate  of  4%  P«r  annum,  that  is  2%  semi- 
annually, determine  the  profit  made  from  the  sale  and  the  mtcrcst  rev- 
enue for  the  two  years  ended  December  31.  1909.  Give  an  analysis  of 
the  Bond  Ledger  account  as  it  would  appear  at  the  close  of  busmess 
December  31,  1909. 

Solution. 


Bond  Lbdger 
Bond  LBDOsm  Account 
|ioo,ooo'Brownsville  4H's  of 


Date 


Description 


1907 — Dec.  31 

1908— June  30 

Dec.  31 

1909 — ^June  30 

Dec.  31 


Purchasedof  X  &  Co. 
Amortization 


It 


Dr. 


I103.39443 


Sold  to  Y  &  Co. 
Amortization 


I 


General  Ledger 


to  net  4%  interest 


Cr. 


I182.11 

185.75 

18947 

51.418-55 

96.63 


Balance 


$103,212.32 
103.026.57 
102,837.10 

51418-55 
51,321.92 


Dr. 


Date 


1909  . 
June  30 

It     tf 


Bond  Sales 

Cr. 

Description 

Amount 

Date 

Description 

Amount 

Brownsville  4^*8 
Profit  &  Loss  ajc 

$51418.55 
1,000.00 

1909 
June  30 

Proceeds 

$50,000 

104.8371% 

$52,418.55 

$52418.55 

$52,418.55 

106 


Practical  Accounting  Problems. 


Interest  Account 


1908 

June  30  To  bond  amortization  $182.11 

Dec.  31     "      "              "  185.75 

1909 

June 30  ;;    ;;         ;;  189.47 

Dec.  31  96.63 

"      "     "  Profit  &  Loss  a|c  7,221.04 

$7,875.00 


1908 

June  30  By  cash 
Dec.  31     "      " 
1909 

June  30    "      " 
Dec.  31     "      " 


$2,250.00 
2,250.00 

2,250 .  00 
1,125.00 


$7,875  00 


Profit  and  Loss  Account 


1909 

June  30  By  bond  sale   $1,000.00 

Dec.  31     '   interest         7,221.04 

$8,221.04 


Analytical  Single  Column  Schedule 


Bond  purchase,  $103,394.43 
Income  rate,  2 %  +        2,067  •  89 


Cash  rate,  23^%  — 


+ 


Bond  sale,  50%  — 


105,462.32 
2,250.00 

103,212.32 
2,064.25 

105,276.57 
2,250.00 

103,026.57 
2,060.53 

105,087.10 
2,250.00 

102,837.10 
51418.55 

51418.55 
1,028.37 

52,446.92 
1,125.00 


Balance,  Dec.  31,  1909   «    $51,321.92 


107 


Accountancy  Problems  and  Solutions. 
ProDiem  28. 

(New  York  Examination,  June.  1910.) 
THE    RICHARDSON    ENGRAVING   AND    PRINTING   COMPANY 

The  Richardson  Engraving  and  Printing  Company,  a  corporation 
having  an  authorized  capital  stock  of  $50,000.00,  owned  by  WiUiam 
Richardson,  f  10,000. 00;  Silas  Johnson,  $15,000.00,  and  Thomas  Acton, 
$35,000.00. 

The  plant  was  destroyed  by  fire  September  23,  1908.  All  the  books 
and  records  were  saved  except  the  sales  records,  which  were  not  written 
up  for  September.  The  insurance  companies  paid  $28,000.00  on  the 
plant  and  $7,000.00  on  the  stock,  which  was  distributed  to  the  stock- 
holders as  received  in  proportion  to  their  holdings.  Cash  was  received 
from  September  sales  amounting  to  $13,500.00.  On  September  30,  the 
trial  balance  disclosed  the  following  condition: 

Capital  stock $50,000 .  00 

Plant $30,000 .  oo« 

Stock  on  hand  June  i,  1908 8,750.00 

Accounts  receivable 19,640.00 

Accounts  payable 12,590 .  00 

Reserve  for  bad  debts 1,350 .  00 

Insurance  adjustment 28,000 .  00 

Cash 3,900 .  00 

Engraving 77,600 .  00 

Printing 99,35°  •  <>° 

September  sales,  not  allocated 24, 1 7  5  •  00 

Merchandise  purchases 58,800 .  00 

W»ges ^. .30.180.00 

Rent 1,800.00 

Salaries 5,750.00 

Profit  and  loss  surplus 855  o© 

William  Richardson 7,000 .  00 

Silas  Johnson 10,500 . 00 

Thomas  Acton 1 7, 5oo .  00 

$293,820.00      $293,820.00 

The  accounts  receivable  realized  $18,320.00,  and  the  liquidation  ex- 
penses were  $1,850.00.  The  stockholders  turned  in  their  stock  for  can- 
cellation and  received  their  proportionate  amount  of  cash.  Prepare 
journal  entries  closing  the  books  of  the  corporation  and  a  profit  and  loss 
account. 

Solution. 

The   RicHAiDSON  Engraving   Co.— Journal   Entries  to  Close   Books 

September  30,  1908 
Insurance  Adjustment,  Dr.    $30,000.00 

To  Plant,  Cr.  $30,000.00 

Book  value  of  plant  destroyed  by  fire  September  23, 

1908. 
Cnh,  Dr.      18,320.00 

To  Accounts  Receivable,  Cr.  18,320.00 

108 


( 


Practical  Accounting  Problems. 


■ 


1,250.00 


1,920.00 


Dr.  77,600.00 
99,350.00 
23,175.00 


u 
u 


Dr.    204,280.00 


Amount  collected  from  debtors  on  general  book 
accounts 

Accounts   Payable,  Dr.    $12,590.00 

To  Cash,  Cr 

Settlements  made  with  creditors  on  general  book 
accounts 

Reserve  for  bad  debts,  Dr. 

To  Accounts  Receivable,  Cr. 

Transfer  of  amount  reserved  to  offset  loss  on  reali- 
zation. 

Realization  and  Liquidation  account,  Dr. 

To  Accounts  Receivable,  Cr. 

Net  loss  on  realization  of  accounts. 

To  Cash,  «* 

Expense  of  liquidation. 
Engraving, 
Printing, 
September  Sales  not  allocated, 

To  Profit  and  Loss  Account,      Cr. 
To  transfer  sources  of  income. 
Profit  and  Loss  Account, 

To  Stock  on  hand,  June  i,  1908,  Cr. 
"   Power, 
"   Wages, 
"  Rent, 
Salaries, 
To  transfer  expense  of  the  business. 
Profit  and  Loss  Acct.,  j^ 

To  Insurance  Adjustment,  Cr. 

"  Realization      and      Liquidation 
Account,  Cr. 

To  transfer  additional  losses  and  expenses. 
Profit  and  Loss  Surplus,  d^ 

To  Profit  and  Loss  Acct.,         Cr. 
To  transfer  balance  of  undivided  profits. 
Capital  Stock, 

To  Wm.  Richardson, 

Silas  Johnson, 
"   Thomas  Acton, 
For  —  shares  of  the  Capital  Stock  of  this  company 
held  by  them  and  now  returned  for  cancellation. 
Wm.  Richardson,  j^^ 

Silas  Johnson,  « 

Thomas  Acton,  « 

To  Profit  and  Loss  Acct,  Cr. 

For  divisions  of  net  loss  in  proportion  to  their  hold- 
ings. 

109 


3,920.00 


855-00 


Dr.      50,000.00 
Cr. 

M 


1,444.00 
2,166.00 

3»6io.oo 


$12,590.00 


1,250.00 


70.00 
1,850.00 


200,125.00 


8,750.00 

57,800.00 

130,180.00 

1,800.00 

5,750.00 


2,ooaoo 
1,920.00 


855.00 


10,000.00 
15,000.00 
25,000.00 


7,220.00 


Accountancy  Problems  and  Solutions. 

Wm.  Richardson.  ^^-  $^'556.oo 

Silas  Johnson.  :  ^^^^ 

Thomas  Acton,  3.oy"""      ^  ^^^ 

To  Cash,  Cr.  $7.78o.oo 

Final  distribution  of  cash. 

The  Richardson  Engraving  and  Printing  Co.— Profit  and  Loss 

Account  September  i  to  23,  1908 

Gross  Earnings,  June  i  to  September  23,  1908. 

Engraving $77,000.00 

Printinc   ...........•.••••■•••••■•*■**  3W»«J3  ^^^ 

September  Saks,  not  allocated ^3. 1 75-00     $200.125.00 

Deduct  expenses  of  operating : 

Inventory  June  i,  1908 8,750.00 

Wages  130,180.00 

Power  57,800.00 

Rent 1,800.00 

Salaries  5.75o.oo       204.280.00 

Loss  on  operating $4,i55-00 

Add  loss  on  fire  adjustment: 

Book  value  of  plant  destroyed $30,000.00 

Insurance  received  ^'OOQ^Q          ^"^'^ 

Add  loss  and  expense  of  liquidation : 

Book  value  of  accounts  receivable $19,640.00 

Less  reserve  for  bad  accounts. 1,250.00 

$18,390.00 
Less  amount  realized 18,320.00 

Loss  on  realization $70.00 

Expense  of  realization ^^SQOO  h920.oo 

$8,075.00 

Deduct  Profit  and  Loss  Surplus ,.     ^^^'^ 

$7,220.00 

Divided  as  follows : 

Wm.  Richardson,  one-fifth $i444-00 

Silas  Johnson,  three-tenths 2,166.00 

Thomas  Acton,  one-half 3.6iaoo        $7^20.00 


110 


Practical  Accounting  Problems. 

Problem  29. 

(Intermediate  Chartered  AccountaDts*  Examination.  June.  1910.) 

3.  X.,  Y.,  and  Z.,  are  in  partnership,  and  on  January  i,  1909,  their  re- 
spective capitals  were  £4,000,  £2,780,  and  ii,S90.  Y.  is  entitled  to  a  salary 
of  £250  and  Z.  to  one  of  £200  per  annum,  payable  before  division  of 
profits.  Interest  is  allowed  on  capital  at  5  per  cent,  per  annum  and  is 
not  charged  on  drawings.  Of  the  net  divisible  profits  X.  is  entitled  to  40 
per  cent,  of  the  ii,ooo,  Y.  to  35  per  cent.,  and  Z.  to  25  per  cent.;  over  that 
amount  profits  are  shared  equally.  The  profit  for  the  year  ended  Decem- 
ber 31,  1909,  after  debiting  partners'  salaries,  but  before  charging  interest 
on  capital,  was  £2,317,  and  the  partners  had  drawn  £800  each  on  account 
of  salaries,  interest  and  profits.  Prepare  the  closing  entries  of  the  Profit 
and  Loss  Account  and  the  Partners'  Accounts  for  the  year. 


Solubon. 

Profit  and  Loss.  .  . .      £418  ^.10  d.o 

To  X.,  Drawmg  Account £200  s.  o  d.o 

7"  u  u       139      o     o 

.^'\  79     10     o 

for  mterest  allowed  on  capital  at  the  rate  of  5  per  cent, 
per  annum,  according  to  partnership  agreement, 
dated 

Profit  and  Loss. ...     £1,898  s.io  d.o 

To  X.,  Drawmg  Account £69^  ^^q  ^  ^ 

7"  u  u       649     10     o 

-     •„        .        ,  549     10     o 

for  aUocation  of  profits  according  to  partnership  agree- 
ment, viz.:  Of  the  net  divisible  profits,  first  £1,000  o  o: 
X.  receives  40%.  Y  35%,  and  Z.  25%,  the  balance  is 
divided  share  and  share  alike. 

X..  Drawing  Account £99  ^^^  ^^ 

2,11         "  "     ^^^     '°     ^ 

'    To  X.,  Capital  Accotiit".  .'.V.;:         .'  W. . . .  ^ , , ,  ^, .  .*"  £99  ,.,0  d.o 

7  *'        .1           I.       238     10     o 

Transfer  of  accounts.             ®     ° 


PROFIT  AND  LOSS  STATEMENT 

^'^^^''^^^^''^^'^^'^^  former  s^Uons £^.767  s.o  d.o 

Partners'  salaries: 

« £250  s.o  d.o 

200    o     o       450     o     o 


Balance. 


^2,317  5.0  d.o 


III 


Accountancy  Problems  and  Solutions. 

Deduct: 
Interest  on  Capital, 

X £200  s.o  d.o 

Y  139     o     o 

Z'  ^^[ 79   10     o     ^4^8  5.10  d.o 

Balance £1,898  5.10  d.o 

Allocation  of  balance  (net  profits): 

X..  40%  of  £1,000 £400    s.od.o 

H  of  £898  5.10  d.o 299     10     o 

£699  5.10  d.o 

Y.,  35%  of  £1,000 £350  s,o  d.o 

ji  of  £8985.10^.0 29910     o      649     10     o 


Z.,  25%  of  £1,000 £250  5.0  d.o 

K  of  £898  i.io  d.o 29910     o      549     10     o 


1,898   10    o 


X.'s  DRAWING  ACCOUNT 


Drawings 

Capital  Account 
frransfer). . . . 


£    s.  d. 
800    o    o 

99  10    o 

£899  10    o 


Interest  on  Capital. . . 
Profit 


£  s.  d, 
200  o  o 
699  10    o 

£899  10    o 


Balance. . 


X.'s  CAPITAL  ACCOUNT 

£      s.   d. 

4,099  10    o        Balance 

Transfer  from  D/A . 


£4,099  10    o 


£      s.  d» 

4,000    o  o 

99  10  o 

£4,099  10  o 


Balance £4,099  10    o 

Y.'s  DRAWING  ACCOUNT 


Drawings 

Capital  Account 
(Transfer) 


Salary  Allowance. .  . 
Interest  on  Capital . 
Profit 


Balance. 


£     s.  d. 

800    o  o 

238  10  o 

£1,038  10  o 


Y.'s  CAPITAL  ACCOUNT 

£      s.   d. 

3,018  10    o        Balance 

Transfer  from  D/A. 


£3,018  10    o 


£     5.  d. 

250    o  o 

139    o  o 

649  10  o 

£1,038  10  o 


£  s.  d. 

2,780  o  o 

238  10  o 

£3,018  10  o 


Balance £3,01810    o 


112 


Practical  Accounting  Problems, 


Drawings 

Capital  Account 
(Transfer) 


Z.'s  DRAWING  ACCOUNT 


£  s.  d. 

800  o  o 

29  o  o 

£829  o  o 


Salary 

Interest  on  Capital , 
Profit 


£     s.  d. 

200    o  o 

79  10  o 

549  10  o 

£829    o  o 


Balance. 


Z.'s  CAPITAL  ACCOUNT 


£       5.   d. 
1,619    o    o 

£1,619    o    o 


£       s.   d. 

Balance 1,590    o    o 

Transfer  from  D/A. .  29    o    o 


Balance 


£1,619    o    o 
£1,619    o    o 


113 


Accountancy  Problems  and  Solutions. 
Problem  30. 

(Virginia  Examination.  November.  1910.) 

The  Gunsaulus  Corporation,  organized  under  a  general  charter  of  the 
State  of  Virginia,  operates  coal  mines,  saw  mills,  a  private  railroad  and 
have  their  own  timber  holdings. 

All  the  accounts  are  kept  in  one  mammoth  ledger,  with  usual  books 
of  original  entry,  at  the  general  office  in  Norfolk.  They  engage  the  serv- 
ices of  yourself  to  audit  the  books  for  the  past  year  (ending  June  30, 

1909;.  The  accounts  in  the  ledger  have  been  forwarded  back  and  forth 
to  economize  stationery  and  the  trial  balance  is  as  follows : 

Account  Debit              Credit 

Plant  and  Equipment — Mine  A $31,955-26 

New  Plant — Mine  7 62,173 .27 

Stumpage — cut  for  saw  mill 7,524.26 

Capital  Stock   $581,500.00 

Betterment  to  Mines  3  and  4 2,783.42 

Local  purchase  logs 51 .66 

Saw  mill  repairs 1,360. 31 

Cash 7*436.05 

Development — Mine  i   3.822.37 

Timber  and  land 240,305.26 

Planing  mill  repairs 34i  -43 

Accounts  Receivable 76,421.91 

Mine  engineering  tools 225.00 

Pfetty  Cash— mines 75000 

Lumber — outside  purchase  79.20 

Lighterage  on  Lumber 57-95 

Mine  administration,  salaries  and  supplies  2,195.22 

Petty  expenses  at  mines 1,649.28 

Tenant  houses  at  mines 2,117.22 

Lumber,  logs,  etc.,  on  hand   50.853  -60 

Saw  mill  payroll  ■  4.141  -41 

Planing  mill  payroll    2421.95 

Commissary  merchandise 8,642. 58 

Feed  and  labor,  mines  stables 925-75 

Electric  repairs  at  mines 467-97 

Commissary  payroll 726.65 

L<igiing  payroll  •  •  200.00 

Unearned  Insurance  Premiums  3.918.49 

Mine  cars   6,139.78 

Lath  mill  payroll   249.65 

Electric  plant— mines    3.190.00 

Interest  on  loans  covering  mine  plant  con- 
struction   7*226. 73 

Mines  warehouse  stock If743.22 

114 


Practical  Accounting  Problems. 

Account  Debit 

Lath  mill  repairs    $7  27 

Railroad  equipment 74,710  38 

Railroad  payroll  and  expense 2241  86 

Camp  equipment 22iq2\4 

Camp  payroll   I'c^o  7c 

Yard  and  shed  repairs  .'.'.'.".'.'.'.'*.'  '11210 

Logging  railroad  trackage "...'/.  47,769. 13 

Salaries   ,*    ,  /: 

,-    ,.      '  1,021.67 

Unclaimed  miners'  wages 

Coal  sales    

Building  material  on  hand  at  mines 810.75 

Interest  on  funds  to  develop  No.  i  mine $240^00 

Mine  office  furniture  and  fixtures   M59^i7 

Mine  officers'  house  furnishing  513.29 

Mine  railway  trackage  and  switches   3,916.82 

Telephone  Line— mill  to  woods '436.56 

Freight  on  logs  to  saw  mill   1,614.40 

Camp  boarding  house  equipment  1,500.00 

Interest  and  discount \r>'>  ntx 

Mine  store  expense  and  labor 2472.83 

Mine   store   freight .72  98 

Saw  mill  machine  shop  2,328.53 

Outside  investments  r'nAn  nn 

»j           J                                                      *»y4y.iA' 

Advanced  to  new  corporation t  ^71  9-7 

^'"p'f  •■• 324,982.92 

bales  of  lumber  

Sales  of  lath  and  shingles  

Insurance— Mill    85  30 

Operation  Chicago  office   j  000.00 

Allowances  and  discount— Coal  shipments  . . .  637! 40 

Repairs  and  expense,  mines  stables   124.22 

Mine  office,  salaries  and  supplies    1,562.23 

Mine  engineering,  salaries  and  supplies 625.00 

Traveling  expenses,  mines  manager 221 .67 

Interest — current  loans  at  mines 125.00 

General  expense    g^-  g^ 

Discount  on  lumber  sold  j  g^j  50 

Bills   Payable   

Accounts  Payable,  audited  

Special  loan    

Taxes — mines    178. Si 

Insurance — mines i  271 .  u 

Legal   Expense — mines    785 .00 

Royalty  on  coal  mined  4,989.77 

Mining  labor   29!87i. 23 

Surplus 

Sales  of  wood 

115 


Credit 


$246. 17 
57.280.78 


$28,033.11 
2.392.45 


172,667.50 
24,287.03 
35,000.00 


195,764.45 
186.00 


Accountancy  Problems  and  SoiuHons. 

Account  Debit             Credit 

Rent  of  dwelling  and  miscellaneeous  income.  $2;aoo 

Yardage  and  tunnel  extension  at  mines $2,743.22 

Delivery  of  coal  to  tipple  3,571 ,28 

Mamtenance  of   Way— mines 710. 11 

Maintenance  of  Air — amines ,  739. 10 

Props,  ties  and  caps 497. 17 

Mine  foreman,  salary  — 800. 00 

Maintenance  of  mine  cars 209.38 

Mine  machinists'  and  engineers*  wages  ......  1,378.78 

Smithing — amines ,  672. 10 

Fuel—mines  power  house  297 .  51 

Removal  of  slate 551 .98 

Deadwork  at  mines  47.21 

Electric  supplies  at  mines  2,488.55 

Insurance  during  construction  of  mine  plant.  937-97 

Norfolk  &  Western  Ry,  claims  at  mines  ....  71.59 

Repairs  to  miners'  houses 171 .  19 

Legal    expense— obtaining    right   of   way   to 

mines 342.68 

live  stock  at  mines 3,850.00 

Taxes  during  construction  of  mines  plant  ...  313 -71 

Mine  commissary  merchandise 8,427.60 

Rental  from  miners'  houses ....•..,  $1,572.27 

Cartage  and  sale  of  coal  to  tenants • . .  70.09 

$1,099,277-85    $1,099,277.85 


They  have  agreed  to  a  plan  whereby  the  coal  mine  operation  will  be 
taken  over  by  a  new  corporation  and  therefore  ask  that  you  separate 
the  lumber  and  coal  accounts,  make  up  a  separate  set  of  statements  to 
cover  each  business  (balance  sheet,  and  statement  of  operation,  with  sup- 
porting schedules  showing  the  profit  and  loss  account  and  surplus  account 
in  detail) — ^the  capital  stock  to  stand  as  part  of  the  lumber  accounts. 

You  find  as  follows: 

That  at  the  beginning  of  the  fiscal  year  the  capital  stock  issued  and 
paid  for  amounted  to  $S75.ooo.oo,  John  Johnson  and  Henry  Mears,  having 
performed  their  duties  in  a  way  acceptable  to  the  officials,  were  allowed 
to  purchase  for  cash  40  shares  and  20  shares  each  of  the  capital  stock 
fc^pectively,  at  $125.00  per  share  (par  $100.00),  and  that  the  $25.00  pre- 
mium per  share  had  been  credited  to  Surplus  Account. 

Bills  Receivable  account  was  balanced  and  closed  but  in  going  through 
the  accounts  you  found  Bills  Receivable,  for  lumber  accounts,  renewed 
from  time  to  time  amounting  to  $2,791.17,  which  certain  customers  had 
not  yet  paid. 

Mine  No.  i  is  in  a  state  of  development  and  has  not  been  as  yet  oper- 
ated. 

116 


Practical  Accounting  Problems, 

In  Accounts  Receivable  $15,180.92  cover  coal  shipments. 

In  Bills  Payable  $50,725.00  cover  mine  investments. 

Insurance  premiums  not  matured  $726.10  on  mine  policies. 

Taxes  paid  in  advance  $78.53. 

Of  the  surplus,  before  closing  the  accounts,  $98,958.44  arises  from 
mme  operation  prior  to  year  ending  June  30,  1909. 

$12,790.79  of  Accounts  Payable  Audited  cover  mine  bills. 

Close  their  books,  showing  necessary  journal  entries  to  adjust  accounts. 

Ihe  Flat  Top  Fuel  Corporation  secures  a  charter  and  capitalizes  with 
M  issue  of  $250,000.00  preferred  stock  and  $200,000.00  common  stock. 
The  preferred  stock  is  subscribed  as  follows : 

The  Gunsaulus  Corporation   $150,000.00 

(They  to  transfer  all  assets  and  liabilities,  as  shown  by  your  state- 
ment covering  the  mines  property,  to  the  Flat  Top  Fuel  Corporation, 
any  equity  to  apply  as  a  payment  on  the  subscription,  balance  to  be  paid 
on  call.) 

A.  Murphy $50,000.00 

($25,000.00  paid  in  cash,  balance  on  call.) 

Andrew  White  $50,000.00 

($25,000.00  paid  in  cash,  balance  on  call.) 

Show  proper  entries  to  make  the  transfer  in  the  books  of  the  Gun- 
saulus Corporation  and  a  balance  sheet  after  doing  so;  also,  entries  to 
open  books  of  Flat  Top  Fuel  Corporation  and  balance  sheet  after  doing  so. 

The  General  Manufacturing  Co..  Inc.,  capitalized  at  $30,000.00  of  which 
the  Gunsaulus  Corporation  owns  50  per  cent,  the  Rock  Lumber  Company 
25  per  cent  and  the  Severn  River  Lumber  Company  25  per  cent,  agree 
to  take  over  the  business  of  each  of  the  three  concerns  named  for  the 
purpose  of  increasing  the  total  output  and  adding  new  products  It 
^mg  agreed  that  any  difference  in  holdings  appearing  in  the  consolidated 
Balance  Sheet  is  to  be  adjusted  later. 

The  Gunsaulus  Corporation  agrees  to  dispose  of  its  plant  for  $250- 
000.00;  reserve  its  timber  holdings  and  $8,000.00  of  Accounts  Receivable 
not  considered  collectible ;  also  assume  all  liabilities  excepting  such  Ac- 
counts  Payable  Audited  as  remain  unpaid.  The  other  companies  submit 
the  following  balance  sheets : 


ROCK  LUMBER   COMPANY 

Account  j^^^^ 

Cash  on  hand  and  in  Bank «t/;  ^to  Or 

Bills    Receivable    jT't 

Bills   Payable    .';;'  ^*'3i-55 

Lumber.  Logs,  etc 52,176.59 

Unexpired  Insurance  Premiums j  -j-  -g 

Mill  Supplies  and  Extras  gjg  ^ 

■^^^s    2W.65 

fi7 


Credit 


$77,191.94 


w 


Accountancy  Problems  and  Solutions. 

Account  Debit  Credit 

Standing  Timber  and  Lands $300,000.00 

Accounts  Payable   $15,197.94 

Surplus   401,321-76 

Mill  Plant  60,500.00 

Accounts  Receivable    67,496.20 

$493,711.64    $493,711.64 


SEVERN   RIVER  LUMBER   COMPANY 

Account  Debit              Credit 

Cash $438.72 

Bills  Receivable  6,008.91 

Lumber,  Logs,  etc 97»303.43 

Unexpired  Insurance  Premiums 417-93 

Mill  Supplies  and  extras  742-59 

Teams   62.50 

Bills  Payable   $39,604.38 

Standing  timber  and  lands  42,811 .83 

Tugboat  2,019.39 

Outside  Investments 6,300.00 

Mill  Plant 30,000.00 

Accounts  Payable  7,912.84 

Surplus  172,093-42 

Accounts  Receivable  33,505-34 

$219,610.64    $219,610.64 


Practical  Accounting  Problems. 
Solution. 

THE  GUNSAULUS   CORPORATION 
OPERATING   STATEMENT— MINES 


MINING 

Mining  Labor.  ...  I29.871  •  23    Cost  of  Mining  Car- 

Machinists  and  Engi-  med      Down     to 

,;°e«^ I1.378.78                           Trading  Section.. 

Smithing 672 .  10 

Foreman 800.00        2,850. 88 

£uel 297. SI 

Electric  Supplies 2,488 .  ss 

Electnc  Repairs 467  •  97        3,254 .  03 

Props,  Ties  and  Cars . .  497 . 1 7 

Deadwork 47.21 

Maintenance: 

Of  Air 739.10 

Of  Way 710.  II 

Of  Mine  Can 209.38       2,202.97 

Removal  of  Slate 55 1 .  98                                 i 

Delivery  of  Tipple. . . .  3.571 .28       4.123.26 

Royalty  on  Coal  Mines  4.989  77 
Commissary       and 
Stables: 
Commissary     Mer- 
chandise   8,427.60 

Freight  to  Store 472 .98 

Store  Exi)ense  and 

L^bor      ........  2.472 .  83 

Feed  and  Labor  Sta- 

_  We? 925-75 

Repairs     and     Ex- 
pense— Stables ...  124 .  22      12.423 .  38 

ls9.715.S2 


*S9.7iS.Sa 


IS9.7IS.S2 


.1 


None  of  the  capital  stock  of  the  new  corporation  has  been  paid  for. 
From  the  figures  you  have  at  your  disposal,  make  a  balance  sheet  show- 
ing the  interests  of  each  company  separately  and  items  of  the  same  class 
in  comparison  with  each  other. 

Draft  a  balance  sheet  for  the  Gunsaulus  Corporation  to  cover  its 
present  condition. 


Cost  of  Coal  Mined.. 
Administrative     Sala- 

ries  and  Supplies . . .  I2.195 .  22 

Traveling  Expenses ...  22 1 .  67 


TRADING 

Js9.715.s2    Sales: 

9°^lv.; SS7,28o.78 

,>.tA««         LessAllowances.etc.        637.40  Is6.643.38 
2,416.89         Coal     to     Tenants  .    ,. 

and  Cartage 70.00 

Gross  Loss  Carried 
Down  to  Profit  * 
Loss  Section S.418.94 


162,132.41 


I62.132.4x 


Gross  Loss  on  Trading. 

Salaries  and  Supplies. .  5x.s62 .  23 

Taxes 100.00 

Insurance 1,271.11 

Petty  Expenses 1,649.28 

Interest 125.00 

Legal  Expensfs 785.00 


PROFIT  AND  LOSS 

f 5.418. 94    Rental  from  Miners' 

_  Houses Si  «79  27 

L^Repai,^....::::  *'1?J:?J 

Net   Loss    Charge-  — 

ABLE  to  Surplus.. 

5.492.62 
^10.911.56 


11,401.08 
9.S10.48 


S10.9x1.56 


118 


119 


Accountancy  Problems  and  Solutions. 


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THE  GUNSAULUS  CORPORATION 

MINES  DEPARTMENT  BOOKS 

JOURNAL  ENTRIES 

The  Flat  Top  Fuel  Corporation,  chartered  under  the  laws  of  the  State 
of  Virginia,  has  this  day  purchased,  taken  over  and  assumed  all  Assets 
and  Liabilities  of  the  "  Mines  Department "  of  this  (The  Gunsaulus  Cor- 
poration) and  the  same  are  hereby  transferred,  set  over  and  assigned  to 
them  on  the  books  of  this  company,  as  by  the  following  entries  will  more 
fully  appear,  in  consideration  of  the  subscription  to  fifteen  hundred  shares 
of  the  preferred  capital  stock  of  the  said  The  Flat  Top  Fuel  Corporation 
of  the  par  value  of  one  hundred  dollars  each;  the  equity  appearing  in  the 
entries  below  being  applied  as  part  payment  on  account  of  the  Gunsaulus 
Corporation's  subscription,  the  balance  to  be  paid  on  call 


Plat  Top  Fuel  Corporation Ii55t309 .  29 

To  Sundry  Assets   (as  per  Mines  Balance 
Sheet*)  transferred 

Sundry  Liabilities  (as  per  Mines  Balance  Sheet*) 

assumed 65,861 .33 

To  Flat  Top  Fuel  Corporation 

Surplus  (this  equity  being  applied  as  part  pay- 
ment on  accoimt  of  shares) 89,447 .96 

To  Flat  Top  Fuel  Corporation 


>i55»309-29 


65,861.33 


89,447.96 


The  Balance  Sheet  of  the  Gunsaulus  Corporation  after  foregoing 
entries  would  comprise  the  lumber  accounts  only  and  would  be  the  same 
as  "  Lumber  Balance  Sheet "  which  is  given  on  page  122. 


*  It  is  not  necessary  to  state  items  in  detail  here  for  the  xeason  that 
itemise  the  Mines  Balance  Sheet. 


120  and  lai 


125 


134 


I 


It    ;t 


Accountancy  Problems  and  Solutions. 


THE  FLAT  TOP  FUEL  CORPORATION  JOURNAL  ENTRIES 

The  Flat  Top  Fuel  Corporation 

Chartered  Under  The  Laws  Of  The  State  Of  Virginia 

Having 

An  Authorized  Capital  Stock 

ci 

$450,000.00 

Divided  into  $250,000.00  Preferred, 

And  $200,000.00  Common, 

All  Shares  Being 

Of  The  Par  Value  of  $100.00  Each 


Gunsaulus  Corporation  Subscription  Accotmt. . .  $150,000.00 
1 ,500  Shares  Preferred  at  par 

A.  Murphy  Subscription  Account 50,000.00 

500  Shares  Preferred  at  par 

Andrew  White  Subscription  Account 50,000.00 

500  Shares  Preferred  at  par 

To  capital  Stock  Preferred  Account 

2,500  Shares  Subscribed  for  as  above 

Qyli. 50,000.00 

To  A.  Murphy  Subscription  Account 

ToAndrew  White  Subscription  Account 

Being  the  agreed  payment  to  be  made  at 
once,  t3alance  subject  to  call. 


$250,000.00 


25,000.00 
25,000.00 


Sundry  Assets  (as  per  "  Mines  Balance  Sheet" 

of  the  Gunsaulus  Corporation*)  Transferred . .    1 55>309  •  29 
To  Sundry  Liabilities  (as  per  '*  Mines  Bal- 
ance Sheet"  of  same  Company*)   As- 
sumed  

To   Gunsaulus   Corporation    Subscription 

Accotmt 

Being  the  transfer  to  this  (The  Flat  Top  Fuel 
Corporation)  company  of  all  the  assets  and 
liabaities  of  the  "Mines  Department"  of 
the  Gunsaulus  Corporation,  as  by  reference 
to  the  formal  agreement  and  transfer  will 
more  fully  appear,  the  equity  (Surplus)  of 
such  assets  and  liabilities  to  be  applied  as 
part  payment  for  the  subscription  of  the 
said  Gunsaulus  Corporation  to  the  preferred 
shares  of  this  company — ^balances  subject 
toc^. 


65,861.33 
«9.447  96 


♦Aathese  items  are full^  detailed  on  pages  lao  and  lai  «•  hair* deemed  h  tumeoeaaarf 
to  tepeat  in  detail  in  these  entries. 


126 


Practical  Accounting  Problems. 


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Accountancy  Problems  and  Solutions. 

Problem  31. 
(Chartered  Accountants'  Examination,  December,  1910.) 

6.  The  trial  balance  of  the  London  office  books  of  the  "  A  "  Rubber  Com- 
pany is  as  follows  on  31st  December,  1909: 

£       s.  d.       £       s.  d. 

Estate   Purchase 3.000  o  o 

Estate   Development    8,000  o  o 

Estate  Produce  Stock,  ist  January,  1909 600  o  o 

Cash  at  Bank,  London 800  o  0 

Estate  Manager,   ist  January,   1909 500  o  8 

Remittance  to  Estate  Manager 1,000  o  o 

London  Office  Expenses 400  o  0 

Share  Capital   12,000  o  o 

Creditors    i»9«>  0  ^ 

Profit  and  Loss  Balance 400  o  8 

£14,300  o  8    £14.300  o  8 


Practical  Accounting  Problems. 


Alter  taking  out  the  above  balances  the  accounts  to  31st  December,  1909, 
are  received  from  the  estate  manager  as  follows  (the  dollar  to  be  taken 
at  2s.  4d.)  : 

Balance,  ist  January,  1909 $4,286- 

Remittance  from  London 8,600 

Rebates    ^3^ 

Sale  of  Produce 2,000 

Profit  on   Rice 249 

Expenditure   on    Development $9,000 

Expenditure  on  Purchase  of  New  Land 2,800 

Expenditure  on  Upkeep  of  Estate i»646 

Balance   carried    forward i320 

$15,266    $15,266 


Solution. 

REVENUE  ACCOUNT. 

£    s.  d. 

Sales  of  Produce 233  6  8 

Profit  on  Rice 29  i  o 

Rebates    15  5  g 

Inventory  Adjustment: 

i    s.  d. 

Stock,  January  i,  1909 600    o  o 

Stock,  December  31,  1909 641  13  4 

Net  increase 

Total  

Deduct — Cost  of  Maintenance  of  Estate 

Balance  carried  down 

Add — Profit  on  Exchange 

Total  

London  Office  Expenses £4cx)    00 

Less — ^Returns  as  above 130  12  8 

Net  Loss  for  the  period 


£     s.  d. 


277  13  4 


41  13  4 


^^319 

68 

192 

08 

£127 

60 

3 

68 

£130  12  8 


269    7  4 


£400    o  o 


The  produce  unsold  at  31st  December,  1909,  was  valued  by  the  manager 

at  $5,500. 
You  are  required  to  construct  the  revenue  account  and  balance  sheet  for 

presentation  to  the  shareholders. 

128 


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Accmntancy  Problems  and  Solutions. 


Practical  Accounting  Problems, 


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Problem  32. 

(New  York  Examination.  January.  1911.) 

The  following  is  the  trial  balance  of  the  X.  Y.  Z.  Coal  Mining  Com- 
pany, as  of  December  31,  1908: 

TRIAL  BALANCE  DEC.   JI,    I908 

Cash   *-  g_ .  -Q 

^ker  and  machinerj; :::::::::::::::  41:0^5:^ 

Ollice  building 1 000  00 

Blacksmith  shop    '.V.V.'.'.V.V.V.  I000.00 

Inside  construction  1567500 

Car  and  mine  rail  account  .*  7,53450 

Horses  and  mules  e  600  00 

Accounts  receivable   ::::;;;;  35;!  12:25 

Bills  receivable  10,000.00 

Capital  stock— common  ....,  '               $>;oooooo 

^t^^^'r^:::- •■••••■•■   -^'s??- 

Accounts   payable    ..........'.'.'        iJsoo.oo 

Depreciation  on  buildings '  and  mkch'^ .' .'  .' .' ." .' .' ." .' ." .' .' .'        12'Joo  00 

supplies  g  240  00           * 

Pay  roll— outside ',[[[[  24 701  qo 

Pay  roll— inside   '  iio!4^4:2'; 

Salaries— superintendent,  etc .".**.'.*  6,00000 

Salaries — office  clerks   4500  00 

Office  expense 1,147  « 

General  expense  75000 

Qiims  for  injuries 4,000  00 

ter^f  i^'^fi-^'  ^"^y ''  1909) :::.'; ;    5,500:00 

Repairs  to  buildings  4,075.00 

Mepairs  to  construction  3  445  00 

Btrii  expense   jIjoooq 

Selling  expense   4.500.00 

Royalty   account    30,500.00 

^^Y 800.00 

£,V^*  • ois.oo 

Timber  and  props  5475.00 

$450>099.35    $450,099.35 

The  total  output  for  the  year  was  132,300  tons. 

An  examination  of  the  books  and  records  shows  that  the  following 
charges  had  not  been  entered:  horses  and  mules.  $2,200;  car  and  mine  rail 
account.  $m5o;  claims  for  injuries.  $1,000.  During  the  year  the  bookkeeper 
tilroiifli  error  charged  to  inside  construction  $3415  instead  of  to  pay  roll 
insiQe. 

The  coal  is  mined  on  lease  that  averages  20  cents  per  ton.  The  inven- 
tory IS  as  follows:  timber  and  props,  $1,500;  powder,  $555;  oil.  etc.,  $175. 
In  preparing  the  above  statements  allowance  for  depreciation  on  buildings 
and  machinery  may  be  considered  at  the  rate  of  5%. 

Prepare  income  and  profit  and  loss  account  and  balance  sheet,  as  of  the 
above  date,  showing  gross  earnings  and  net  earnings,  also  the  avWage  cost 
per  ton. 

132 


Solution. 

INCOME  AND  PROFIT  AND  LOSS  ACCOUNT  FOR  THE  FISCAL 
PERIOD  ENDING  DECEMBER  31,  1908. 

Coal   Sales $257,890.00 

Cost  of  Mining: 

Pay  Roll— Inside $113,849.25 

Royalty   26,460.00 

Supplies  8,240.00 

Timber  and   Props 5,475-00 


Less  Inventory  December  31,  1908: 

Powder   $555-00 

Oil   175.00 

Timber  and   Props 1,500.00 


$154,024.25 


2,230.00  $151,794.25 


Cost  of  Preparation : 

Pay  Roll — Outside $24,701.50 

Water   goo.oo 

^"^^    93500      26,436.50 


Repairs  to  Buildings ! 4,075.00 

Repairs  Inside 3,445.00 

Barn  Expense 1,500.00 

Insurance    2,750.00 

Depreciation  on  Buildings  and  Machinery 7,700.00 

Gross  Profit  Down 60,189.25 


$257,890.00  $257,890.00 


Gross  Profit 

Management  Expenses: 

Salaries,  Superintendent,  etc $6,000.00 

Salaries,  Office  Clerks 4,500.00 

Office  Expense 1,147.35 

General   Expense 750.00 

c  ...        „ $12,397-35 

Selling   Expense 4,500.00 

Qaims   for   Injuries 5000.00 

Net  Profit  carried  to  Surplus  Account 38,291.90 


$60,189.25 


$60,189.25    $60,189.25 


Average  cost  per  ton $1.66 

Average  net  earnings  per  ton 29 


133 


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Practical  Accounting  Problems. 


Problem  33. 

(New  York  Examination,  January,  191 1.) 

The  A  Manufacturing  Company  incorporated  under  the  laws  of  the 
State  of  New  York,  with  a  capital  of  $100,000,  consisting  of  1,000  shares 
of  $100  each,  all  of  which  has  been  paid  in  cash,  presents  the  following 
balance  sheet  as  of  May  31,  1909: 

ASSETS 

Cash $125,000.00 

Materials  and  supplies 25,000.00 

Accounts  receivable 300,000.00 

Plant  and  buildings 400,000.00 

$850,000.00 

LIABILITIES  ^-^— — 

Accounts  payable  $20,000.00 

Capital  100,000.00 

Surplus   730,000.00 

$850,000.00 

Annual  sales,  $800,000.  ^-^— ^^ 

The  B  Manufacturing  Company  incorporated  under  the  laws  of  the 
State  of  New  York,  with  a  capital  of  $1,000,000  consisting  of  10,000  shares 
of  $100  each,  presents  the  following  balance  sheet  as  of  May  31,  1909: 

ASSETS 

Cash $50,000.00 

Materials  and  Supplies 25,000.00 

Accounts  receivable 200,000.00 

Jla"J  •  •  ■ 500,000.00 

Goodwill   700,000.00 

$1,475,000.00 

LIABILITIES  ^^— ^— ^ 

Accounts  payable  $150,000.00 

Capital  1,000,000.00 

Surplus    325,000.00 

$1,475,000.00 
■■■■■■■■■■■■■■I 

Annual  sales,  $600,000. 

Both  concerns  are  engaged  in  the  manufacture  of  the  same  commodity 
and  desire  to  consolidate  for  the  purpose  of  maintaining  prices,  but  will 
continue  to  operate  each  plant  separately.  They  organize  the  United 
Manufacturing  Company  with  a  capital  stock  of  $200,000  consisting  of 
2,000  shares  of  $100  each,  the  members  of  the  A  Company  agreeing  to 
subscribe  for  1,000  shares  and  to  pay  for  them  in  cash  and  the  members 
of  the  B  Company  for  1,000  shares  also  payable  in  cash;  the  stock  is 
issued  to  the  following: 

Comprising  the  A  Company: 

C— Certificate  i  for  250  shares 
D—        "         2    "    250       " 
E—        "         3    "    250       " 
F—         "         4    "    250       " 

13s 


Accmmmcy  Problems  and  Solutions. 


Comprising  the  B  Company: 

G— Certificate  5  for  ^50  shajfes 

H; "  6  250 

|*_  '«  7     "     250 

J—        "        8   "    250 


II 


^  .        A-  ^  A,  trMsurv  of  the  United  Manufacturing  Com- 
The  cash  «  pa.d  mto  ^^^X\^  ^^peetive  subscribers. 

p^  on  the  'f  «J""  5*  ^^^'^^^^^  purchases  and  pays  cash  for  the 
The  United  Manufactnnng  ^^"'P*'''  P", 

rtock  of  materials  and  supplies  °*J°*  """^^  f,„„  t^e  A  Company  its 

The  United  Manufacturing  5°"^^'    '^^°^d  in  addition  thereto 

pfant  ud  agrees  to  pay  an  annual  «"^°*Jf;^„^  ,3^,,  of  $QO.ooo  for 

win  p.,  the  officers  """f  "8  *'/  ptot  an  ann  ^^  ^^  ^^ 

Adr  serrices.   The  rent  for  the  » '^^'^^i.^^'o/'ie^ooo.    It  is  agreed 
«|  the  officers  are  t°«<=7'f  ,„'"""!  ,»aS  and  maintenance  are  to 
AMt  aU  addi»k.ns  to  the  plants  and  » '  J'P"" 
be  paid  for  by  the  United  Manufacturmg  Company.  ^^  ^  ^^ 

h„„&^  of  both  plants  ^^^^°^^^^\^  ZoVs  of  the  United 
«ar  May  31.  t9io  the  balances  appearmg  on  tne 
Mannfactnring  Company  are  as  follows: 


f*g|^|l      ,, 

Accounts  receivable 
Additions  to  plant  . 
Acconnts  payable  . . 
Capital  stock 


$200,000.00 

200,000.00 

60,000.00 

160,000.00 

200,000.00 


Tfce  trading  transactions  of  the  respective  mills  are  as  follows: 


A  CX)MPANY*S  MILL 

P«rd»8es-raw  materials  and  supplies  . . .  - 

Labor :::::;:;: 

Ftelory  expense •  •  * ;: ' ; 

eSS/ and  maintenance  of  plant  

Olice  expense  

ment  of  plant ;  •;;;; 

Oficers'  salaries 

Saks  


$160,000.00 

300,000.00 

100,000.00 

80,000.00 

60,000.00 

90,000.00 

go.ooo.oo 

907,000.00 


B  company's  mill 
-raw  materials  and  supplies  . . . 


$140,000.00 

250,000.00 

Labor  ........'.''.*.••••  75,ooo.oo 

Factorv   expense    .••*,"1 .  70,000.00 

Repai7and  maintenance  of  plant •  ; ; ; ; ;  ^50,000.00 

Office  expense 60,000.00 

Rent  of  plant ;  ]  ]  [ 60,000.00 

Ofcers'  salaries " ' ' 778,000.00 

The  stock  as  of  May  31.  iQio.  *=<^"^»f*"^,.f  $10,000.00 

Materials  and  supplies---A  g^^P^Jjy  «  ^|{  ; ; '  * ' ;  ]  ] ; .  x5.000.00 

llaterials  and  ^"Prt*^^  rom^Svs  miU  S.ooo.oo 

Labor  due.  not  paid-A  Company  s  mi     ^^^^ 

Labor  due.  not  paid-B  Company  s  mm  — 

136 


Practical  Accounting  Problems. 

Open  the  books  of  the  United  Manufacturing  Company;  prepare  bai- 
lee sheet  as  of  May  3..  .9.0  and  consolidated  trading  and  profit  and 
loss  account  showing  profits  for  each  mill.  As  the  mill!  have  been  iZ 
m  perfect  repair  no  depreciation  is  to  be  considered;  outstanding  ac™ 
are  considered  good.    Provide  for  a  dividend  of  10%. 

Prepare  percentage  table  of  each  mill,  showing  to  four  (4)   decimals 

prodS    ''  "'  '""•  °'  '"'  '°"°*^'^  ''^""^  "«--*  '"'  total  c"™  of 

Materials  and  supplies. 

Labor. 

Factory  expense. 

Repairs  and  maintenance. 

Rent  of  plant. 


Solution. 

UNITED  MANUFACTURING  COMPANY. 
Opening  Journal  Entries.  May  31,  1909. 


Subscribers    



To  Capital  Stock 

Subscriptions  to  the  Capital  Stock  of  the  United 
Manufacturing  Company,  incorporated  under  the 
laws  of  the  State  of  New  York,  authorized  cap- 
ital, 2,000  shares  of  $100  each,  as  follows : 

^  $25,000.00 

E 
F 
C 
H 

J  V.V."  V.V.V. 


$200,000.00 


$200,000.00 


25,000.00 

25,000.00 

25,000.00 

25,000.00 

25,000.00 

25,000.00 

25,000.00 


^-^Sil    

To  subscribers  . . 


$200,000.00 


Materials    and    Supplies j. 

To  Cash .7.;;;;;'.*.;;.  ■"  ^^*''°^*^ 

Purchased  from: 

A.  Company $25,000.00 

B.  Company  ^,5^^^^ 


$200,000.00 


$50,000.00 


n7 


Accountancy  Problems  and  Solutions 


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138 


Practical  Accounting  Problems. 


UNITED  MANUFACTURING  COMPANY. 

Consolidated  Trading  and  Profit  and  Loss  Account  for  the  Year 

Ending  May  31,  1910. 

Purchases    <t^<«  ^^^^ d. 

Lai^^^  ?ioo,ooo.oo    $140,000.00  $300,000.00 

Factory  Expense::::::::: fic^  t'Z~  ''''°°°'" 

Rent  of  Plant  ZZ^       S  '^^•°°°°° 

Repair  and  Maintenance  :;:::::::-      ^ZZ       ToZZ      1"^°°°°" 

ou.ooo.oo        70,000.00       150,000.00 


$735,000.00    $605,000.00  $1,340,000.00 
10,000.00        15,000.00       25,000.00 


Less— Inventory,   May  31,   1910.... 

Cost    of    Production     <^-7^r  nnr^r^      Cp.,^^  ^ 

Sales  ?/25,ooo.oo    $590,000.00  $1,315,000.00 

907,000.00      778,000.00    1,685,000.00 

Gross  Profit  


$182,000.00    $188,000.00    $370,000.00 


General  Expense: 

^r^'^.r= ^r::  tr'^  ^--^ 

90,000.00     60,000.00  1 50,000.00 

Total  *,-  A 

$150,000.00    $110,000.00  $260,000.00 

Net  Profit  for  Year  Ending  May  31,                        ~  ~~               " 

Divi^nVDecIared,"  10% $32,000.00      $78,000.00  $110,000.00 

20,000.00 

Undivided  Profits   


$90,000.00 


Percentage  of  CoNsuMmoN  Against  Total  Cost. 

Rau    Materials   and   Supplies.  ^  ,, 

Labor  ^-^/^ 

Factory    ............'.* '^^'^^ 

Repair  and  Maintenance ^^ 

Rent  of  Plant  "''^ 

12.42 


21.19% 
44-c6 

12.72 
11.86 
10.17 


100.00%        100.00% 


r 


139 


Accountancy  Problems  and  Solutions, 

Problem  34. 
(New  York  Examination.  January.  1911.) 

From  the  following  trial  balance  of  Johnson  &  Thompson,  Incon»ii- 
rated,  as  of  June  30.  1910,  the  end  of  their  fiscal  year,  prepare  a  mannfac- 
tiiring  and  profit  and  loss  account  and  financial  statement: 

Cash  on  hand ?7500 

Cashinbank 3.750X)0 

Inventory  July  i,  1909  ^^^ 

Rawmaterial 33^0^ 

Finished  goods ^*^    '  

$540,000.00 

Sales  ^   , 

^1                                              ..         8,463.00 
Return  sales  '^"^ 

Freight  and  express  outward  935-00 

^      ,  195,670.00 

Purchases ''*'  »*«««« 

Accounts  payable ^  ^  ^ 

Bills  payable  

Accounts  receivable 45.920. 

I  Q2S.00 

Bills  receivable '^"^ 

„,  232,927.00 

Wages   — 

11,270.00 

Fuel   ^  Q^ 

,.  . .  3,648.00 

Factory  supplies  -^  4,763,011 

Cash  discount  on  purchases 

Freight  and  express  inward  7433-00 

_      .  27,000.00 

Land.. __ 

18.000.00 
Buildings  "^'"^ 

Machinery  and  Tools 80,000.00 

Maintenance  and  replacement 

of  machinery  and  tools $10,580.00 

Less  amount  received  from  old  ^o^nnn 

machinery  and  tools 6.750-QO         3,830.oo 

Mortgages  payable.  6%  interest  paid  to  ^^^^ 

May  I,  1910 128000 

Reserve  for  bad  and  doubtful  accounts '^'^^ 

Suspense  account 

Worthless  accounts  receivable  ......  u/y-w 

Patent  rights-disbursements   t-  320.oo 

Depreciation-buildings  4.900.00 

machinery  and  tools •   ■■         ^'^ 

140 


Practical  Accounting  Problems. 

Advertising    ...  ^ . 

rp        ,.                   $670.00 

TravcUng  expenses  ....  ,  ,^  «« 

r^a:                                  3,700.00 

Cimce  expenses    . . 

e  .    .        ,                 5,300.00 

5>alanes  of  officers  .. 

Dividends  ..  "'^"^ 

Interest  ...     "•^°°'" 

r^.. 700.00 

discount  on  sales  . .  ^ 

^    .^  ,         ,             2,760.00 

Capital  stock   ^ 

Surplus $100,000.00 

8,972.00 

$723,015.00    $723,015.00 
Inventory  June  30.  1910:  — — 

Raw  material t^^^o 

D  ^,    ^  .  ,    ,  $27,698.00 

Partly  finished  goods  

Fuel    

1,200.00 

Although  machinery  and  tools  are  maintained  and  replaced   .%  d«.« 
o-on  must  be  al.owed  on  them  as  we,,  as  s%  depreciation!  fuiW^^L" 


f 


141 


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Accountancy  Problems  and  Solutions. 

Solution, 

MANUFACTURING  AND  PROFIT  AND  LOSS  AND  INCOME 

STATEMENT. 

$540,000.00 

gjllgg  V  •  ^'^  ' 

Amount  Received  from  Sales •  •  •  •  •  •  ^^^^^^^^  ^^^°*      ^ 

Freight  and  Express  Inward 7»433-«> 

Inventory,  7/i/9 ^^^'£2??  *., ^Ar.nn 

9,760.00  $43,240.00 

Inventory,  6/30/10 $27,698.00 

11,590.00    39,288.00        3,952.00 

Cost  of  Goods  Sold ^^'Slw 

Wages •  * ^  *^^ 

Prime  Cost  of  Material  and  Wages $439,982.00 

Overhead  Charges : 

Fuel  ^'"'A^sm 

Factory  Supplies ^'Sl^vl. 

Maintenance  and  Replacement.. 3.»30-«> 

Depreciation,    Machinery,    Tools    and  ,0^^800 

Buildings 4>90O0O     22,44800 

Cost  of  Producing  Goods  Sold ^AdO-OO 

$68.172  00 

Gross  Profit  on  Sales. ''"^ 

Commercial  Expenses : 

Advertising   ^1^"^      «^  ,*,««« 

Traveling     370o.oo      $4,370.oo 

Administration  Expenses :  ^c^nnfm 

Office  Expenses T5,nIInJI      i-rfinooo      2107000 

Salaries  of  Officers • 12,300.00      17,600.00      21^970^00 

Profit  and  Loss  Gross  Income $46,202.00 

Otlicr  Income:  476^00 

Cash  Discounts  on  Purchases 4>y"J'W 

Total  Income ^50,965.00 

Charges  against  Income: 

Suspense  Account ;f>0790" 

Less  difference  between  ^^-  ^ 

se rve «pi ,2oo.»ju 

and    2%'  on    Accounts   Re-  $,,7^ 

ceivabk 918.40        36160        $3i7-40 

Interest  • ••  •• •  •   •       ^7oaoo 

Interest     accrued     on     Mortgage,     two  o^r^ 

months  ^7Q-^  ^^"^ 

Discounts  on  Accounts  Receivable 2,7(^.00       3,947>40 

$47,017.60 


Practical  Accounting  Problems. 


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143 


Accountancy  Problems  and  Solutions, 

Problem  35. 

(New  York  Exammation.  January,  1911.) 

A  corporation's  inventory  on  Jan.  2,  1909,  was : 

Raw  materials •  • ^^!'1i2  22 

PtoJ'  .^  !'!''''■::::;::::::::::::::.':.'■■.•: ::::::::::  18:673:18 

Made  up  foods _!9iZ5M7 

The  corporation  suffered  a  fire  loss  on  May  i,  1909;  the  interim  trans- 
actions affecting  mercliandising.  manufacturing  and  plant  were  as  follows: 

Purchases  raw  materials ^^  ^^IrS 

Productive  labor  paid  out eif^'^ 

Manufactoriiig  expenses. ,. ^'i^'ivJ 

lent  of  show  room  and  offices -1^  ^c 

Selling  expenses ''?i$'S 

Advertising  A^.'f^ 

General  expenses ^rE? /i^ 

Sales ^H]n^ 

Allowances  to  customers «?i,i^ 

Returns  of  customers -^l'^ 

Plant  purchases __jj^^^ 

The  figures  ascertained  for  the  years  1906,  1907  and  1908,  for  the  iden- 
tical items,  were  as  follows: 

1906  1907  1908 

Purchases  raw  materials $186,320.16  $104,360.22  $i57.3i[6.20 

Productive  labor  paid  out 90.322.24  61.212.06  72.io6.i4 

Manufacturing  expenses 20,163.12  16,208.17  20,210.23 

Rent  of  show  room  and  offices 1,500.00  1.200.00  ,200.00 

Advertising J'?^°2  ,/;^????  J'^^ 

Selling  expenses 28.672.18  16,3  4-^  22.3  2.18 

General  expenses 10,750.16  9.746.22  1 1,1 16.20 

Sites     ...   ■ 386,924.12  217.306.01  321.672.18 

Allowances  to  customers bV^^i  ^'^  o  ,?^;'^ 

Returns  of  customers »,oi4.o»  4,100.15  3.10722 

Plant  purchases  Soo.oo  540.22  40900 

Inventories  beginning  of  year 

Raw  materials. 39.223.16  31.316.20  334i6.20 

Goods  in  process 6,104.12  3.107.12  ^26.  8 

Made  up  goods 21,223.10  17.306.29  ;|622.  2 

Plant..... 17.223.96  17.723.96  18.264.18 

You  are  employed  by  the  assurers;  all  policies  concur  under  the  80% 
coinsurance  clause  and  the  insured  claims  his  loss  is  42!%  of  the  prime 
cost  of  his  goods  and  value  of  his  machinery  at  time  of  the  fire ;  the  per- 
centage claim  is  adjusted  at  that  figure.  The  amount  of  insurance  in  force 
was  as  follows :  on  merchandise  stock,  $40,000 ;  on  plant,  $12,500. 

Prepare  requisite  statements  showing  the  value  of  the  assets  destroyed. 

144 


I 


Practical  Accounting  Problems. 


Solution. 

Prime  cost  is  here  to  be  understood  to  mean : 

1.  Raw  materials. 

2.  Productive  labor. 

3.  Manufacturing  expenses. 

It  is  necessary  to  a  clear  understanding  of  this  problem  to  ascertain  the 
average  amount  of  raw  materials,  productive  labor  and  manufacturing 
expenses  used  up  in  the  goods  actually  sold  from  the  last  time  inventory 
was  taken.  For  this  purpose  the  figures  for  the  three  previous  years  are 
given  amongst  others. 

Using  these,  we  find  the  following: 

Raw  Materials  Account. 

Inventory  Jan.  2,  1906 $39,223.16 

Purchases  during   1906 186,320.16 

J        ,        ^  $225,543.32 

Inventory  Jan.  2,  1907 ^^,^^,^,^ 

Purchases   dunng   1907 104,360.22 

Deduct:  $135,676.42 

Inventory  Dec.  31,  1906 31,316.3^ 

Inventory  Dec.  31,  1907 ,^^,^^^ 

T      ^      T  «  $194,227.12   $102,260.22 

Inventory  Jan.  2.  1908 33^,5^ 

Purchases   dunng   1908 157,316.20 

Total:  ^^90,732.40 

Raw  Material  used  1906 $19422712 

Raw  Material  used  1907 ,^  'V* 

r>       nr  ^    •  1        J        o 102,260.22 

Raw  Material  used  1908 ,^0  ^.. 

150,205.22 

$454,752.56 
Deduct :  — ^— -- 

Inventory  Dec.  31,  1908 32,467.18 

$158,265.22 


145 


mm 


Accountancy  Problems  and  Solutions. 

Productive  Labor  Account. 

1906.  Amount   paid  therefor $90,322.24 

1907.  Amount  paid  therefor - .      61,212.06 

1908.  Amount  paid  therefor 72,106.14 

$223,640.44 

Manufacturing  Expenses. 

1906.  Amount  paid  therefor $20,163.12 

1907.  Amount   paid   therefor 16,208.17 

1908.  Amount  paid  therefor 20,216.23 

$56,587-52 

Sales  Account. 

deductions. 

Gross  Sales.   Allowances.    Returns.  Net  Sales, 

i^  $386,924.12       $1,116.24      $8,614.08  $377,193-80 

1907  217,306.01         3,605.75       4.106.18  209,594.08 

1908  321,672.18            975.00       3.167.22  317.529.96 

$925,902.31        $5,696.99    $15,887.48 
15,887.48 

21,584.47       

$904,317.84  $904*31 784 

Average  %  of  Raw  Materials  used  in  goods  actually 

sold $454,752.56 

$904,317.84    50.28% 
Average    %    of    Productive    Labor    used    in    goods 

actually  sold  223,640.44 

904,317.84    24.73% 
Average  %  of  Manufacturing  Expenses  used  in  goods 

actually  sold 56,58752 

904,317-84     6.25% 

Component  Elements  of  Costs  in  Prime  Costs. 

%  to  Selling  Price.    %  to  Prime  Cost. 

Raw  Materials  50.28%  61.88% 

Productive  Labor   24-73%  30-43% 

Manufacturing  Expenses    6.25%  7.69% 

The  same  percentages  will  prevail  in  goods  in  process  and  made  up 
goods.  Arriving  now  at  the  period  where  the  fire  loss  occurs,  we  note 
that  the  last  inventory  taken  was  on  January  2,  1909. 

146 


■""'■■•■■■ M..™,f^jsi:4|iih,';ij|i'iiilr"  ...,^.  ,„,„,^„,„  _^^^^^^ 


Practical  Accounting  Problems. 

Analysis  of  Inventories  Jan.  2,  1909. 

Component  Component 

Raw  Ma-    Elements  of         Elements  of       Total, 
terials.  goods  in  process,  made-up  goods. 

Raw  Materials   $32,467.18         $2,606.52  $12,223.45      $47,297.15 

1,281.78  6,010.98         7,292.76 


Productive  Laboi 


Manfg.  Expenses 


323.92 


1,51904         1,842.96 


$32,467.18         $4,212.22 


$19,753.47      $56432.87 


Construction  of  Goods  on  Hand  May  i,  1909,  When  Fire  Occurs. 

Raw                Productive  Manfg. 

Materials.                Labor.  Expenses 

Inventory  Jan    2,   1909....  $47,297.15               $7,292.76  $1,842.96' 

Purchases  to  May,  1909. .. .     46,375.22  pd.  out    21,618.06  pd.  out  5,167.20 


^3,672.37 
Deduct : 

Used-up  goods  actually  sold    46,879.66 


On  hand  May  i,  1909. . . .    $46,792.71 


$28,910.82 
23,057.56 

■ • 

$5,853.26 


$7,010.16 

5,827.32 

$1,182.84 


Synthesis  or  Reconstruction  of  Goods  in  Process  and  Manufactured 

Goods  on  Hand  May  i,  1909. 

The  total  of  Productive  Labor  and  Manfg.  Expenses 

amount  to  t      a  q     of 

The  total  of  Raw  Material's'  amoun't'  to ! : ; ! .' .' .' ." ! !  [  [  [  ]  ]    iJ^"      S 

$18457-77    100.00% 

n,°f^tf  T  h"*  *"'^'-*/  "'  ^"*  ^^'"'^'^  ^°«=""^d  in  P"tly  made 
or  totally  "ade-up  goods  from  the  total  Raw  Material  proper,  or  $46.- 
792.71,  we  find  the  total  inventory  on  May  i,  .909,  as  follows: 
Raw   Material   proper 

Goods  in  Process  and  Made-up  Goods. '. $35,37i-04 

18,457.77 

$53,828.81 
The  loss  adjusted  being  42%%,  we  find  the  same  to  be '$22,877.24 

The  plant,  we  note  as  accountants  for  the  assurers,  not  to  have  been  re- 
duced  by  any  depreciation  for  the  last  three  years,  nor  any  reserve  set  up 

147 


ft 


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- — '— ~ "lilHHW"!! 


Accountancy  Problems  and  Solutions, 

against  it  for  this  purpose,  therefore  we  will  allow  a  yearly  depreciation 
of  io%  on  the  diminishing  value  to  prevail,  viz. : 

Plant  and  Machinery  Account. 

Inventory,  Jan.  i,  1906 $17,223.96 

Purchases.  1906 ^^^ 

17,723.96 

10%  Depreciation i,772AO 

Value.  Dec.  31.  i9o6 I5.95i.56 

Purchases,   1907   540.22 

16491-78 

10%   Depreciation 1,64918 

Value,  Dec.  31.  i907 1484260 

Purchases,   1908   40900 

15,251.60 

10%  Depreciation i,525-i6 

Value,  Dec.  31.  1908 13J26.44 

Purchases,  1909.  to  May  i 301.22 

14,087.66 

Depreciation,    10%   per   annum,   or  3%%   for   four 

months    469-55 

Value  of  Plant  May  i,  1909 $13.618.11 

Loss,  42Vi%,  adjusted %5.7^7'70 


Practical  Accounting  Problems. 


Problem  36. 

(Illinois  Examination,  May,   1911.) 

ipSl'f  aHoIWsr  "'  '"'  ^^~""^  "'  '"'"  ^•"'"'  ^'  3.st  December. 

Accounts  Receivable  

Accounts  Payable  $5,140.00 

Bills  Payable 2,692.00 

Bills  Receivable ^^'^ 

Loan  Advanced  by  J.  Smith     ^^^'^ 

Cash  on  Hand 5^*» 

Bank    Overdraft "^^ 

Inventory,  January  i,  1910 "  ^'*^5-°o 

Purchases    3.020.00 

Sales 7,386.00 

Wages    16,406,00 

Office  Salaries  ...   ............'.*. 4.83900 

Traveling  Expenses  1,045.00 

Interest  Paid  50300 

Stationery ^^^'^ 

Rent,  Taxes  and  Insurance........*.* ^'^ 

Discounts  and  Allowances............." ^^"'^^ 

Machinery  Expense  and  Fuel     258.00 

Freight 264.00 

Incidental  Expenses 206.00 

Commissions    151.00 

Rents  Received 50.oo 

Capital  .*'**] 329.00 

Bad  Debts   .*' 3.249.00 

97-00 

$48,798.00 

Rent  $200.00  a  year  is  charged  to  September  30,  loio-  repairs  to  en*„-«. 

estimated  at  $90.00,  account  not  yet  received  ^^ 


I  If 


149 


Ill IIPI 


Accountancy  Problems  and  Solutions. 


Solution. 

TRIAL  BALANCE  OF  JOHN  SMITH. 

December  31.  i9io- 

.    , ,  .    $5,140.00 

Accoimts  Receivable $2,692.00 

Accoimts  Payable   658.00 

Bills  Payable   ^^^^ 

Bills  Receivable   -^ ^ 

Loan  advanced  by  John  Smith ^'^ 

Cash  on  Hand 1,065.00 

Bank  Overdraft   ^^ 

Inventory,  January  i,  1910 "  7  386.00 

Purchases   " " '  '                16,406.00 

S^^^^ 4,83900 

Wages  ....• ■•;;  1^045.00 

Office   Salaries    $0300 

Traveling  Expenses   * ' "  ^^^'^ 

Interest    Paid ' "  ^^ 

Stationery  222  00 

Rem,  Taxes  and  Insurance ^    "^ 

Discounts  and   Allowances ^'^ 

Machinery  Expense  and  Fuel J^^ 

Freight j  -  j  q^ 

Incidental  Expenses ^^ 

Commissions    329.00 

Rents    Received •  •  •  • "  • '  3,249.00 

Capital 97.00 

Bad  Debts „ _ 

$24,39900    $24,39900 


!  '{-J 


Practical  Accounting  Problems. 

''^irl%oTrZ''lZ,'k''''  ^°^^  STATEMENT  OF  JOHN 
SMITH  FOR  THE  PERIOD  ENDING  DECEMBER  3,,  ,9," 

Sales  

Deduction  from  sales : $16406.00 

Discounts  and  allowances $,^.00 

Reserve   for  discounts j^ -^ 

Total  deduction  from  sales.  ,0^ 

300.50 

Amount  realized  from  sales.  ^ 

$16,019.50 

Cost  of  Manufacture  : 

Prime  Cost: 

Inventory  January    i,    1910 $202^0^ 

Purchases   ....  JP3,02o.oo 

Freight  Forward   ...     ^'^"^ 

206.00 

Cost  of  materials jRiofiT^or. 

Wages    ...  ?io.6i2.oo 

4,839.00 

Total  prime  cost 

Factory  overhead  charges : ^S^Sioo 

Machinery  expense  and  fuel $^4  ^o 

Repairs  to  engine 9000 

Total  overhead  charges  ~         "" 

^     354.00 

Cost  of  production..  ~         ~~ 

15305.00 

Gross  profit  on  sales..  ~~ 

$214.50 

Cost  of  Sales  : 

Traveling  expenses  

Commissions    $503.00 

50.00 

■ 553-0O 

SelHng  loss   

$338.50 

Cost  of  Administration  : 

Office  salaries   

Stationery $1,045.00 

Incidental  expenses   284.00 

151.00 

Total   administration   expenses  ""       ' 

1,480.00 

Total  loss  on  sales "" — 

$1,818.50 

151 


if 


•■■i 


■■III II 


III. ijiiiiiiiiiiiiiiiiiiiiiii iiiiniiMiii 


Accountancy  Problems  and  Solutions. 


Practical  Accounting  Problems, 


Deduct  other  income: 

Rents  received  

Interest  accrued  on  loan  (not  cred- 
ited)     


$329.00 


20.00 


349.00 


$1469-50 


8 

no 

re- 


charges against  Income: 

Rents,  Taxes  and  Insurance $222.00 

Rent  accrued  (not  charged) 50.00 

Bad  Debts   

Reserve  for  Bad  Debts 

Interest  Paid  

Total  charges  against  income 

Net  Loss 


$272.00 

97.00 

150.00 

173.00 


692.OD 
$2,161.50 


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153 


Accountancy  Problems  and  Solutions. 


Problem  37. 

linois  Examination,  May.  1911.) 


A  testator  bequeathed  by  his  will  legacies  amounting  to  $6,700.00^  His 
widow  was  to  be  paid  $1,000.00  within  one  month  after  his  death,  and 
his  household  furniture  was  specifically  bequeathed  to  her.  $74.12  was 
found  in  the  house  and  the  cash  at  the  bankers  was  $1,842.91.  His  in- 
vestments were  valued  at  $48,461.12  (their  nominal  value  being  $45,000^00). 
His  real  property  was  valued  at  $68,000.00.  Persons  were  indebted  to 
him  for  loans  without  interest  for  $45000.  while  his  creditors  were 
$7,276.54.  The  funeral  expenses  came  to  $98.16,  probate  and  miscellaneous 
expenses  to  $4,697.45. 

Draw  a  statement,  showing  the  "  corpus "  to  be  dealt  with  by  the 
executors,  assuming  that  the  investments  were  bonds  bearing  mterest  at 
4  per  cent.,  that  the  real  property  yielded  6  per  cent.,  that  the  former  were 
paid  half-yearly,  and  the  latter  quarterly,  and  that  both  interests  and  rents 
fell  due  two  months  after  the  testator's  death. 


Solution. 

SUMMARY   STATEMENT    OF   THE   EXECUTORS   OF   THE 
ESTATE  OF DECEASED I9- 

We  charge  ourselves  with  the  following: 
For  Account  of  Principal: 

Estate  as  per  Inventory,  viz. : 

Cash  in  the  House $741-2 

Cash  at  Bankers 1,842.91 

Investments   (4%  bonds) 48,46112 

Debtors 45o.«> 

$50,828.15 

Amount  of  Increase,  viz.: 

Interest  on  Bonds  (accrued  at  time 

of  death)   $600.00 

Rent  (i  month  accrued  at  time  of 

death) •       340.00 

—_—         940.00 

Total  Oarges  as  to  Principal. . . .  $51,768.15 


Practical  Accounting  Problems. 

For  Account  of  Income : 

Interest  on  Bonds  (2  months  after 
death   of   testator) $300.00 

Rent  (2  months  after  death  of  testa- 
tor)         680.00 

Total  Charges  to  Income 

Combined  Total  Charges 

We  credit  ourselves  with  the  following: 
Payment  out  of  Principal: 
Testamentary  Expenses,  viz. : 

Funetal  Expenses  $98.16 

Probating  will  and  miscellaneous..     4,697.45 

$4f795-6i 

Debts  due  by  deceased 7i276.S4 

Amounts  paid  to  legatees 1 000.00 

Specific  bequest  to  the  wife  of  tes- 
tator   

Balance  to  be  dealt  with  by  executors 


98aoo 

$52,748.15 


I3»07a.i5 


$391676.00 


lij 


15s 


Acc0wm^ney  Problems  and  Solutions. 
Problem  38. 

(New  York  Eiaminatioii,  June,  1911) 

The  cost  books  of  Factory  A,  the  product  of  which  is  charged  to  the 
office  of  the  X.  Y.  Z.  Co.,  at  factory  cost,  show  the  foUowing  facts 
January  i,  1910: 

Cash  (imprest  fund)  $500;  raw  materials.  $17,688.51;  wages  unpaid 
and  distributed,  $2,348.67 ;  goods  in  process,  at  prime  cost,  $62,258.61 ,  plus 
111,352.75  for  general  expenses,  and  $9,007.50  for  management  charges; 
finished  goods,  $45,290.20. 

The  invoices  for  purchases  of  raw  materials  for  the  year  amounted  to 
$78,375.65;  wages  paid,  $133,041-27;  management  charges,  $53,695; 
factory  expenses,  $36,967.08.  The  cash  recepits  for  one  year's  rent  of  loft 
were  $1,200,  and  for  11  months'  sale  of  power  $330,  the  twelfth  month 
being  unpaid. 

The  raw  materials  consumed  during  the  period  amounted  to  $64,188.33 ; 
management  charges  distributed  $55,761.90;  factory  expenses  distributed 
to  costs  amounted  to  $43,033.23-  There  was  also  a  loss  on  machmery 
replacements  of  $  i  o 7 .  50 . 

The  finished  product  output  for  the  year  amounted  to  $324,583-43.  in- 
cluding all  costs,  and  the  transfers  to  the  main  office  were  $338,297-90- 

At  the  close  of  the  period  December  31,  1910,  there  remained  unpaid 
and  undistributed  to  goods  in  process  the  regular  factory  pay  roll  for  3 
days  amounting  to  $2.85793  and  also  1500  hours  of  operative's  overtime 
mt  an  average  rate  of  45  cents  per  hour,  payable  on  a  basis  of  a^  hours 
overtime  as  the  equivalent  of  3*  hours  regular  time. 

Raise  all  the  ledger  accounts  affected  and  show  final  trial  balance. 


Main  Office 


Main  Office. .... 
Purchases 


Solution. 

Cash  Account. 

$500.00 

Raw  Materials. 

.    $17,688.51     Manufacturing  acc't. 
78,375.65     Balance 


$96,064.16 


$64,188.33 
$96,064  .16 


Balance. ^3^*875 .83 


Ijfi 


Practical  Accounting  Problems. 

Capital  Accounts. 

Main  Office $107.50 

Wages. 


Main  Office $133,041 .27 

Balance 3,802.93 


$136,844.20 


Main  Office......   ...  $2,348.67 

Manufacturing  ace  t. .  130,692.60 

Regular  pay  roll. . . , .  2,857  93 

1 ,  500  hours  overtime .  94  5  -  00 

$136,844  .20 


Balance $3,802.93 

Manufacturing  Account. 


Main  Office $62,258.61 

Raw  Material 64,188.33 

Wages 130,692.60 

Management 55,761 .90 

Factory  gen .  expenses  43,033.23 

^^355.934  67 


Finished  goods $324,583  .43 


Balance 


31.351  24 


*355.934  67 


Balance $31,351.24 

Factory  General  Expenses. 


Main  Office ^^i.352-75 

Main  Office 36,967.08 


$48,319.83 


R^nt $1,200 .00 

Power 330  .  00 

Power  tenant  charge .  30.00 

Manufacturing  acc't. .  43,033  23 

Balance 3,726.60 

$48,319.83 


Balance $3,726.60  ^— — — 

Finished  Goods. 

Main  Office. $45,290  20        Main  Office $338,297  go 

Manufacturing  acc't. .    324,583  -43         Balance 3i!57S  73 


1369,873  63 


3^.575  73 
$369,873  63 


Balance $31, 


575  73 


Tenant. 


Factory  gen.  expenses  $3 o  .  00 

Management  Charges. 


Main  Office $9,007  .  50 

Main  Office 53,695  .00 

$62,702  .50 


Manufacturing  acc't. .    $55,761 .90 
Balance 6,940.60 

$62,702  .50 


Balance $6,940 .60 


157 


Accountancy  Problems  and  Solutions. 


Main  Office  Account. 


Wages Ia,348 .67 

Rent  received 1,200 .00 

Power 330 .00 

C«i>ital  ace' ts  (replace)  107.50 

Pinislied  goods 33^,297  .90 

Unpaid  pay  roH 3,802  .93 

Balance. 102,089  .  57 

1448,176.57 


Sundries $146,097 

Raw  material 78,375 

Wages 133.041 

Management 53,695 

Factory  gen.  expenses      36,967 


57 

65 
27 

00 

08 


$448,176.57 


Balance $102,089  57 


Trial  B.\ lance. 


Raw  material 

Manufacturing  acc't. . 
Factory  gen.  expenses 

Management 

Finished  goods 

Tenant 


$500 .00 
31.875-83 

31.351-24 
3.726.60 
6,940.60 

31.575-73 
30  .00 

■—■■■■UliO m — 

$106,000  .00 


Capital  accotmts 

Wages 

Main  Office  accounts. 


$107  .50 

3,802.93 

102,089.57 


$106,000.00 


158 


Practical  Accounting  Problems. 


Problem  39. 
(New  York  Examination.  June.  1911.) 

Philip  Jones,  a  citizen  of  New  York  State,  died  April  i,  1909,  leaving 
a  will  appointing  four  executors.  The  will  was  probated  May  i,  1909, 
showing  the  following  bequests: 

X  i^  share,  B  }i,  C  ^  of  the  entire  estate  after  payment  of  funeral  ex- 
penses, debts,  etc.,  a  specific  bequest  to  the  A  Hospital  consisting  of  $20.- 
000  and  a  parcel  of  improved  property  valued  at  $50,000. 

The  inventory  filed  by  his  executors  was  as  follows:  5%  mortgage  for 
$40,000,  interest  payable  semi-annually  on  June  30  and  December  31 ;  500 
shares  common  stock  of  Industrial  Company,  par  value  $100,  appraised  @ 
iio;  50-5%  first  mortgage  bonds  of  A  Railway  Company,  par  value  $100. 
appraised  @  104,  interest  payable  semi-annually  on  March  i  and  September 
I ;  accounts  receivable  valued  at  $20,000 ;  cash  in  banks  and  on  hand,  $69,- 
250;  household  furniture  and  effects  appraised  at  $5,500. 

The  executor's  transactions  were  as  follows: 

Cash  Receipts. 
500  shares  of  Industrial  stock  sold  @  $115  per  share. 
45  first  mortgage  bonds  sold  July  i  @  $111  and  accrued  interest. 
Accounts  collected,  $18,500  (balance  worthless). 
6%  dividend  on  Industrial  stock  declared  May  i,  1909. 
Interest  on  bank  balances  $1,300,  of  which  $40o'accrued  prior  to  tes- 
tator's death. 

Interest  on  bonds  and  also  on  mortgage  duly  collected. 
Rents  collected  $4,000,  of  which  $1,500  accrued  prior  to  death  of 
testator. 

The  household  furniture  and  effects  were  taken  by  X  at  the  appraised 
valuation. 

Cash  Payments. 

Ftmeral  expenses • 

Expenses  of  probating  will .  . ' ' " ,^? 

General  legal  services 

Rent  of  safe  deposit  vault ''°co 

Care  of  cemetery  lot,  etc ^In 

Premium  on  executors'  bonds f  00 

Stationery,  postage,  etc 

Debts  of  deceased .  „  o? 

Taxes '..■.■.'.'.■.;;;: li^^ 

X  on  account  of  legacy *  " " " 12*00^ 

C  on  accoimt  of  legacy «^'     ° 

^     -^  30,000 

The  inventory  on  December  31,  1909,  the  date  on  which  the  executors 
wish  to  render  an  accotmting,  is  as  follows: 

5  %  mortgoge  $40,000. 

Five  5%  first  mortgage  bonds  of  A  Railway  Company. 

Interest  on  X  s  advances  amounts  to  $3  50  and  on  C's  advances  $575. 

159 


f 


Accountancy  Problems  and  Solutions. 


Practical  Accounting  Problems, 


Prepare  (a)  a  summary  statement  separating  principal  and  income  • 
(b)  a  statement  showing  amounts  due  beneficiaries,  (c)>  statement  show- 
ing the  commission  due  executors. 

Solution. 

(o)  Summary  Statement  op  the  Executors  op  the  Estate  op  Philip 

Jones,  who  Died  April  i,  1909. 

We  charge  ourselves 

First,  as  to  Principal,  with— 

Amount  of  inventory $194,950  .00 

Amount  of  increase,  viz. : 

Industrial  stock $2,500  .00 

Railway  bonds 3 1 5  .00 

Rent   and   interest   accrued 
prior  to  testator's  death. ..        2,420 .83        5,235  .83 

Total  charges,  as  to  Principal . . 

Second,  as  to  Income,  with — 
Amount  of  dividend  on  industrial  stock. . . 

Amount  of  interest  on  advances 

Amount  of  interest  on  bank  balances 

Amoimt  of  rent 

Amount  of  interest  on  mortgage 

Amount  of  interest  on  bonds 


1 


Total  charges,  as  to  Income. 


Combined  total  charges,  principal  and  in- 
come.   

We  credit  ourselves: 

First,  as  to  Principal,  with — 
Amount  of  testamentary  expenses,  viz, : 

Funeral   expenses $2,ocx).oo 

Probating  of  will 335-oo 

General  legal  services 1,000.00 

Rent  of  safe  deposit  vault 50.00 

Care  of  cemetery  lot,  etc 500.00 

Premium  on  executors'  bonds 100.00 


$200 

.185.83 

$3,000 

.00 

925 

.00 

900 

.00 

2,500 

.00 

1,500 

.00 

66 

.67 

8, 

891 

.67 

$209, 

077 

50 

Amount  of  miscellaneous  payments : 

Debts  of  deceased $12^65.00 

Taxes    1,02500 


Amount  lost  on  acc'ts  receivable... 

Amounts  advanced  to  legatees,  viz. : 

X.,  Cash  advances 12,000.00 

Interest  on  advances.         350.00 
Household  furniture..      5,500.00  $17,850.00 


$3,985.00 

13,890.60 
$1,500.00 


C,  Cash  advances $20,000.00 

Interest  on  advances.         57500    20,575.00 


38,425.00 


Total  credits,  as  to  Principal $57,800.00 

160 


Second,  as  to  Income,  with 

Amount  of  stationery,  postage,  etc $125.00 

Combined  total  credits,  Principal  and  Income $57,925.1 

Balance    

Deduct : 


00 


$151,152.50 


Executors'  commissions  as  per  statement $4,981.72 

SpeciHc  bequest  to  "A"  Hospital 20,000.00 


24,981.72 
$126,170.78 


Balance  available  for  legatees  consists  of  the 
foUowmg : 

A  5%  mortgage   for $40,000.00 

l;^ive  5%  mortgage  bonds  at  104. .         520.00 
^sh    85,650.78 

$126,170.78 


(b)  Statement  Showing  Amounts  Due  Beneficiaries 

Total  value  as  per  inventory $194,950.00 

Total  net  increase,  viz.: 

Tn^r^f ^'  principal $5.23583 

Increase,  mcome 8,891.67 

T  «cc     n  $14,127.50 

ixss— Decrease    1,500.00      12,627.50  $207,577.50 


Disbursements,  exclusive  of  advances: 

Testamentary  expenses $398500 

Miscellaneous  payments 14,015.00 

Balance  

Deduct : 


18,000.00 
$189,577.50 


Executors'  commissions  as  per  statement $4,081  72 

Specific  bequest  to  "  A  "  Hospital .' .' ."      ^Joo.w      24,981.72 


Balance  available  to  legatees. 
Deduct   advances 


Remaining  balance  for  distribution. 


$164,595.78 
38,425.00 

$126,170.78 


X.  IS  therefore  entitled  to  %,  or $37,015.26 

?>'l^^'^'' 41,148.95 

C-**^^'°^ 48,066.57 


$126,170.78 


161 


Accountancy  Problems  and  Solutions. 

(c)  Statement  Showing  Amounts  Due  Executors  for  Commissions 

Total  value  of  estate  as  per  inventory $I94,95000 

Total  net  increase  (as  shown  in  Statement  b) 12,627.50 

Total  amount $207,577-50 

Deduct : 

Specific  bequest  to  "  A  "  Hospital $20,000.00 

Inventory  on  hand  at  the  time  of  rendering  this 
accounting 40,520.00      60,520.00 

Balance  on  which  commissions  are  to  be  com- 
puted    $147.05750 

Allowing  5%  on  the  first  $1,000.00 $50.00 

Allowing  2^%  on  the  first  $10,000.00 250.00 

Allowing  1%  on  the  balance  of  $136,057.50 1,360.57 

$1,660.57 


As  the  value  of  the  estate  is  over  $100,000.00  and  there  are  four  ex- 
ecutors, three  single  commissions  are  to  be  allowed  to  be  divided  among 
the  four  executors. 

The  total  commission  is  therefore  $4,981. 72  and  each  individual  execu- 
tor's share  is  $1,245.43. 


1O2 


•WP 


Practical  Accounting  Problems. 


Problem  40. 
(New  York  Examination.  June,   19!  I.) 

The  Prosperous  Company  is  organized  under  the  laws  of  the  State  of 
New  York  to  conduct  a  manufacturing  business.  The  authorized  capital 
is  $500,000.00,  divided  into  $250,000.00  common  and  $250,000.00  preferred 
stock,  par  value  of  shares  $100.00.  Five  incorporators  subscribe  each  for 
one  share  of  common  stock  at  face  value.  John  Peters,  one  of  the  incor- 
porators, purchases  from  three  manufacturing  companies  their  complete 
plants  for  $499,5oo.oo  and  transfers  said  plants  to  the  Prosperous  Com- 
pany for  the  remaining  $499,500.00  of  common  and  preferred  stock  and 
$100,000.00  of  First  Mortgage  5%  bonds  out  of  a  total  issue  of  bonds 
amounting  to  $150,000.00,  leaving  $50,000.00  of  bonds  in  the  treasurv.  The 
incorporators  then  pay  in  cash  for  their  respective  subscriptions. 

The  individual  assets  acquired  are  as  follows:  land  and  buildings, 
$75,000.00;  plant  and  machinery,  $200,000.00;  tools,  equipment  and  fixtures' 
$50,000.00;  inventories,  $100,000.00;  accounts  receivable,  good,  $28,00000' 
doubtful,  $5,000.00;  cash,  $12,000.00. 

Prepare  (a)  opening  entries  for  the  books  of  the  Prosperous  Company, 
(b)  initial  balance  sheet  showing  the  Company's  financial  condition. 


163 


Accommtancy  Problems  and  Solutions, 

Solution. 

THE  PROSPEROUS  COMPANY. 

Incorporated  under  the  laws  of  the  State  of  New  Yoek 

with  an 

AUTHORIZED  CAPITAL 

of 

$500,000.00. 

divided  into  2,500  shares  of  common  and  2,500  shares  of  preferred  capital 

stock,  par  value  of  each  $100.00. 

Common  Stock  Subscriptions $500 .00 

Unsubscribed  Common  Stock 249,500 .00 

Unsubscribed  Preferred  Stock 250,000 .00 

To  Authorized  Common  Stock $250,000 .00 

Authorized  Preferred  Stock 250,000 .00 

for  the  respective  subscription  to  five  shares  of 

the  Common  Capital  stock  of  this  Company  by 

one  share  each,  also  to 

place  the  authorized  issue  on  the  books. 

Plant,  Good  Will  and  Stmdry  Assets 599»5oo  .00 

To  John  Peters,  Vendor $599. 500  00 

for  the  transfer  to  this  Company  of  his  rights, 

title  and  interest  in  all  of  the  assets,  including 

the  good  will  acquired  by  him  from  X,  Y  and  Z, 

Companies  fully  enumerated  in  the  bill  of  sale 

dated ,  approved  by  the  Board 

of  Directors,  as  shown  in  the  Minute  Book  page 

First  Mortgage  Treasury  Bonds 150,000 .00 

To  First  Mortgage  Payable 150,000 .00 

in  accordance  with  the  resolution  of  the  Board 
of  Directors  the  Company  was  authorized  to 
issue  $150,000.00  of  first  mortgage  bonds  pay- 
able   bearing  five  per  cent,  interest. 

Subscription  to  Common  Stock 249,500 .00 

Subscription  to  Preferred  Stock 250,000 .00 

To  Unsubscribed  Common  Stock 249,500  .00 

Unsubscribed  Preferred  Stock 250,000  .00 

for  John  Peter's  subscription  to  balance  of  un- 
subscribed stock. 

John  Peters,  Vendor 599t5oo  00 

To  Subscription  to  Common  Stock 249,500 .00 

Subscription  to  Preferred  Stock 250,000 .00 

Treasur)'  First  Mortgage  Bond. 100,000 .00 

164 


Practical  Accounting  Problems, 

for  2,495  shares  of  common  and  2,500  shares  of 

preferred  stock  and bonds  issued  to  the 

above  in  full  payment  for  the  assets  transftrred 
to  this  Company. 

Cash $500.00 

To  Common  Stock  Subscription 

payment  for  subscription  by  the  respective 
subscribers. 

In  accordance  with  a  resolution  of  the  Board 
of  Directors  fully  recorded  in  the  Minute  Book 
page  . .  .the  following  entry  is  made  in  order  to 
place  the  various  assets  acquired,  on  the  books 
of  the  Company. 

Land  and  Buildings 75,000 .00 

Plant  Machinery 200,000 .00 

Tools,  Equipment  and  Fixtures 50,000 .00 

Inventories 100,000 .00 

Accounts  Receivable 28,000 .00 

Cash 

Good  Will 

To  Plant,  Good  Will  and  Sundry  Assets. . . . 

Accounts  Receivable 

To  Reserve  for  bad  and  doubtful  debts.  . . . 
This  entry  is  made  in  order  to  record  the  doubt- 
ful and  bad  accoimtsin  the  controlling  account. 


$500.00 


12,000  .00 
134,500.00 

5,000.00 


599,500.00 


5,000.00 


i6S 


Accountancy  Problems  and  Solutions. 


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Practical  Accounting  Problems. 

Notes  on  Problems. 

Problem   1. 

The  wording  in  this  problem  is  ambiguous.  It  reads  that  repairs  and 
renewals  are  to  be  charged  to  the  plant  and  a  depreciation  of  six  per  cent, 
per  annum  is  to  be  allowed.  Repairs  and  renewals  should  be  charged  as 
a  revenue  and  not  as  a  capital  expenditure.  The  problem  does  not  state 
whether  the  repairs  and  renewals  in  question  were  of  such  a  nature  as  to 
increase  the  earning  capacity  of  the  concern. 

With  regard  to  the  solution,  it  will  be  observed  that  in  charging 
depreciation  on  plant  the  wording  of  the  problem  was  followed  to  the 
letter,  and  therefore  cannot  be  criticised  as  incorrect.  The  interest 
on  loans  was  distributed  respectively  between  New  York,  Chicago,  and 
Minneapolis  on  the  same  basis  as  the  interest  on  capital.  While  this 
division  of  interest  on  loans  may  be  questioned,  yet  from  the  wording  of 
the  problem  nothing  else  could  be  inferred.  The  problem  states  that  "  in- 
terest on  borrowed  money  was  to  be  distributed  according  to  the  invested 
capital  at  each  branch."  Whether  the  capital  of  which  that  interest  is 
charged  was  divided  according  to  the  original  investment  or  not  the 
problem  does  not  state. 

Problem  2. 

The  solution  of  this  problem  consists  of  two  statements.  The  first  one, 
which  is  a  summary  accounting  statement  of  the  executor,  is  not  made 
out  strictly  in  accordance  with  the  requirements  of  the  law;  no  dates  are 
supplied  by  the  examiners  and  it  is,  consequently,  impossible  to  distinguish 
between  principal  and  income.  All  interest  on  the  bonds  and  mortgages 
is  considered  as  principal  in  this  case  and  is  entered  under  the  amounts 
of  increases.  The  executor  has  realized  on  the  assets,  part  of  which  had 
been  accepted  by  the  legatees  as  advances;  the  balance  is  all  cash,  to  be 
distributed  among  the  three  children  according  to  the  separate  statements 
appended,  showing  clearly  the  amounts  advanced  in  cash  and  otherwise, 
and  the  balances  due  to  each  legatee.  It  will  be  noticed  that  the  testator 
has  limited  the  allowance  of  the  executor  in  the  will;  he  cannot  claim 
more  than  $2,500,  although  the  calculation  according  to  the  law  might 
have  resulted  in  a  larger  fee. 

Problem  3. 

This  is  a  real  problem  illustrating  the  adjustment  of  partners'  capi- 
tals in  a  liquidation  where  it  is  desired  to  distribute  the  assets  in  install- 
ments as  soon  as  they  are  received,  thus  paying  the  monthly  distribu- 
tions before  the  final  net  profit  or  loss  has  been  ascertained  on  the  total 
realization.  The  question  will  now  arise:  on  what  basis  should  each  in- 
stallment be  distributed?    How  should  the  first  installment  be  divided? 

It  should  not  be  apportioned  in  the  ratio  of  the  original  investments, 
that  is,  4 :  3 :  2 :  I ;  neither  can  it  be  divided  in  the  proportion  the  profits 
or  losses  are  divisible,  nor  proportionately  to  the  capitals  at  the  dissolu- 
tion of  the  partnership. 


166 


167 


M 


Accountancy  Problems  and  Solutions. 

The  correct  method  would  be  to  equalize  the  status  of  the  partners, 
and  justly  so  for  this  reason;  it  is  quite  impossible  to  know  beforehand 
how  much  the  remaining  assets  will  realize;  ergo,  assuming  that  no  more 
cash  will  be  received,  the  consequent  loss  must  be  borne  by  the  partners 
in  the  agreed  ratios. 

Let  us  therefore  illustrate  the  equalization  procedure  at  this  stage  of 
the  operations. 

Net  capital  at  time  of  dissolution  $90,000.00 

Deduct : 

Liquidation  expenses,   first  month $  400.00 

First  month's  cash  installment 21,890.00      22,290.00 


Leaving  unrealized  assets  as  an  assumed  loss  aggregating..  $67,710.00 
Capital  balances,  after  deducting  first  month's  expenses : 


A 

B' 

c 

D 

$36,660.00 

$27,048.00 

$17,552.00 

$8,340.00 

Division  of 

35% 

am 

22% 

15% 

losses 

23,698.50 

18,958.80 

14896.20 

10,156.50 

Eqpaltzcd  capitals    12,961.50 


8,089.20 


2,655.80 


♦1,816.50 


♦Deficit 

D  must  bring  in  additional  $1,816.50  to  cover  his  deficit. 
The  first  month's  cash  installment  will  be: 
Cash  collected  for  distribution $21,890.00 

D's  new  cash  1,816.50 

$23,706.30 

Which  will  be  distributed  between  A,  B  and  C  in  accordance  with 
Hittr  equalized  capital  holdings,  viz.: 

A   . $12,961.50 

B 8,089.20 

€ 2,655.80 

$23,706.50 

An  eminent  authority  on  the  correctness  of  the  principle  involved  in 
the  problem  under  review,  Henry  Rand  Hatfield,  Ph.  D.,  Associate  Pro- 
fessor of  Accounting  at  the  University  of  California,  favors  the  equaliza- 
tioii  method.  In  his  admirable  Modern  Accounting  he  says:  "The  ad- 
justment between  partners  having  once  been  made,  all  further  install- 
ments are  to  be  divided  in  proportion  to  the  division  of  losses.  This  is 
not  because  the  division  of  assets  is  at  all  the  same  as  the  division  of 
profits  or  of  losses,  but  because  this  method  of  treating  all  unrealized 
assets  as  potential  losses  prevents  any  one  of  the  partners  being  over- 


Practical  Accounting  Problems. 

In  Dicksee's  Advanced  Accounting  a  problem  is  given,  illustrating 
the  basic  principle  under  discussion.  Dicksee  also  favors  the  solution  on 
the  equalization  basis.  Hence,  in  any  contingency  the  partners  will  be 
paid  their  just  and  equitable  shares,  and  the  prime  object  of  the  distri- 
bution has  been  accomplished. 

The  5%  commission  should  be  eliminated  from  the  partnership  ac- 
counts; it  is  a  private  agreement  to  be  adjusted  by  the  partners  inter  se. 

Suppose,  after  the  equalization  of  the  partners'  capitals,  D  is  not  pre- 
pared to  produce  cash  to  cover  his  deficit  of  $1,816.50,  how  will  then  the 
cash  distributions  be  divided  between  A,  B  and  C  before  and  after  D 
has  made  good  his  deficit?  How  much  will  D  get  after  reimbursing 
A,  B  and  C?  In  this  instance  D's  deficit  must  be  borne  by  A,  B  and  C  in 
the  ratio  35:  28:  22,  thus: 

First  Month's  Cash  Distribution. 

A*s  equalized  capital $12,961.50 

Less  35/85  of  $1,816.50 747.97    $12,213.53 

B*s   equalized   capital 8,089.20 

Less  28/85  of  $1,816.50 598.38       7490-82 

C's   equalized   capital 2,655.80 

Less  22/85  of  $1,816.50 470.15       2,185.65 

Total    $2 1,890.00 

Second  Month's  Cash  Distribution. 

A*s  share,  35%  $15,207.50 

Add  35/85  of  $1,816.50  from  D 747.97    $15,955-47 

B*s  share,  28%  12,166.00 

Add  28/85  of  $1,816.50  from  D 598.38      12,764.38 

C*s  share,  22% 9»55900 

Add  22/85  of  $1,816.50  from  D 470.15      10,029.15 

D's  share,  15%   6,517.50 

Less  his  deficit  apportioned  to  A,  B,  and  C 1,816.50        4,701.00 

'^^^^ $43,450.00 

The  third  and  fourth  months'  cash  distributions  will  be  the  same  as 
stated  in  the  solution  above. 

Another  solution  to  this  problem  may  be  of  interest  to  the  reader: 
In  accordance  with  Dicksee's  method,  that  where  payments  are  made 
to  partners  before  all  assets  have  been  realized,  the  partners'  accounts 

169 


Accountancy  Problems  and  Solutions. 

iliould  be  brouglit  to  the  ratios  in  which  they  share  profits  or  losses,  we 
proceed  as  follows: 

Amounts  to  credit  of  partners'  accounts,  after  debiting  their  propor- 
tions of  the  loss  is  $8,000;  and  the  personal  drawings  arc:  A,  $36,800;  B, 
$27,160;  C,  $17,640;  D,  $8,400. 

Taking  D's  credit  as  15%  of  the  equalized  capital  (which,  it  will  be 
found,  is  the  easiest  way),  we  get,  A,  35%,  $19,600;  B,  28%,  $15,680;  C, 
22%,  $12,320;  D,  15%,  $8,400. 

As  the  capital  accounts  of  A,  B,  and  C  are  all  in  excess  of  their  equal- 
ked  capital,  a  sufficiently  large  amount  to  reduce  their  capital  to  the  equal- 
iied  amount  should  be  paid  them  before  any  payment  is  made  to  D. 

The  cash  receipts  for  the  first  month  are  arrived  at  thus : 

Book  value  of  assets  realized $30,190.00 

Less  liabilities  liquidated $7,900.00 

Less  loss  and  expenses 400.00       8,300.00 

$21,890.00 

If  this  amount  were  distributed  among  A,  B,  and  C  in  the  ratio  of  35, 
28,  and  22,  the  amounts  paid  over  would  be:  A,  $9,013.53;  B,  $7,210.82; 
C,  $5,665.65 ;  but  the  amount  necessary  to  reduce  C*s  captal  to  the  equalized 
capital  is  only  $5,320.  so  we  adopt  this  method : 

Cash  receipts $21,890.00 

Less  payment  to  equalize  C's  capital 5,320.00 

To  ht  divided  among  A  and  B. $16,570.00 

Dividing  this  amount  in  the  ratios  of  35  and  28  we  get,  A,  $9,305.56;  B, 
$7,364-44. 

But  C  has  to  pay  A  and  B  a  commission  of  5%  of  his  share,  or  $266, 
which  we  deduct  from  the  amount  payable  to  him,  and  credit  in  equal 
•mounts  to  A  and  B,  increasing  the  amounts  of  cash  paid  to  them  accord- 
ingly. 

The  cash  receipts  for  the  second  month,  ascertained  in  the  same  way 
as  those  of  the  first,  amount  to  $43,450,  from  which  we  deduct  amounts 
necessary  to  equalize  A  and  B's  capital  accounts,  viz. : 

A $7,994.44 

B 4,11556 

$12,110.00 

leaving  $31,340,  and  all  subsequent  cash  receipts  to  be  distributed  to  all 
partners  in  the  ratio  of  35,  28,  22,  and  15 ;  C  and  D's  shares  to  be  subject  to 
the  5%  commission  payable  to  A  and  B. 

I'TO 


IS 


» 


Practical  Accounting  Problems. 


To  Drawings  $400.00  By  Capital  Account 

**    35%  of  loss  $8,000. . .     2,800.00       Investment    $40,000.00 

*•    Balance  36,800.00 


$40,000 .  00  $40,000 .  00 

By  Balance   $36,800.00 

To  Cash  on  account $9,338.56     "    C  }4  commission  on 

"    Balance    27,594.44      his  share   133.00 


$36,933.00  $36,933.00 

To  Cash  to  reduce  capital  By  Balance $27,594.44 

to  rate  of  35% $7,994.44 

Balance  35% 19,600.00 


M 


$27,594-44 
To  35%  Loss  and  expense 
of  liquidation 

First  month... $400. 00  $140.00 

Second  month.  750.00  262.50 

*  Cash    11,258.89 

*  Balance    8,228.50 


$27,594.44 

By     Balance  35% $19,600.00 

"    C  5^  commission  on 

his   share    172.37 

"    D  H  commission  on 

his   share    117.5a 


$19,889.89 
To  35%  Loss  and  expense 
of  liquidation 
Third  month... $340. 00      $119.00 

"    Cash    5,701.29 

"    Balance    2,555.00 


$19,889.89 

By  Balance  35% $8,228.50 

"    C  H  commission  on 

his  share    87.28 

D  }4  commission  on 
his  share   :.         59-51 


(( 


$8,375.29 
To  35%  Loss  and  expense 
of  liquidation 
Fourth  month. $110. 00       $38.50 
"    Cash   2,583.01 


$8,375-29 

By  Balance  35%- -. $2,555-00 

C  ^2  commission  on 

his  share    39-54 

D  54  commission  on 
his  share   26.97 


tt 


tt 


$2,621.51 


$2,621.51 


B 

Dr.  Cr. 

To  Drawings  $600.00  By  Capital  Account 

28%  of  loss  $8,000 2,240.00       Investment   $30,000.00 

Balance    27,160.00 


M 


$30,000.00  $30,000.00 

To  Cash  on  account $7497-44  By  Balance $27,160.00 

"    Balance    19,795-56  "    C  J^  commission  on 

his  share 133.00 

$27,293 .  00  $27,293 .  00 

To  Cash  to  reduce  capital  By  Balance $1 7,795  •  56 

to  rates  of  28% $4115.56 

Balance   28% 15,680.00 


« 


$19,795.56 
171 


$19,795-56 


I 


Accountancy  Problems  and  Solutions. 


To  28%  Loss  and  expense 
of  liquidation: 

First  month  ..$400.00  $112.00 

Second  month.  750.00  210.00 

'*    Cash    9,065.10 

**    Balance   0,582.80 


By  Balance 28%  $15,680.00 

"    C  H  commission  on 

his  share 172-37 

"    T>  Yz  commission  on 

his  share ii7'S3 


$15,969.90 
To  28%  Loss  and  expense 
of  lii|iiidatioii : 
Third  month.. $340. 00       $95.20 

*'    Cash   4,590.40 

"    Balance,  28%     2,044.00 


$15,969.90 

By  Balance 28%   $5,582.80 

"    C  Yi  commission  on 

his  share 87.2^ 

"    D  K  commission  on 

his  share 59'5i 


$6,729.60 
To  28%  Loss  and  expense 
of  liquidation: 
Fourth  month. $110.00       $30.80 


$6,729.60 

By  Balance 28%   $2,044.00 

"    C  Y2  commission  on 

his  share 39'55 

"    "D  Y2  commission  on 

his  share 26.96 


$2,110.51 


To  Drawmgs  $600.00  By  Capital  Account 

*'    22%  of  loss  $8,000 1,760.00  Investment 

••    Balance    17,640.00 


$20,000.00 
To  A  commission  $133... 
"    B  commission  $133.  ■■      $266.00 

5%  of  share 
"    Cash  to  reduce  capital 

to  ratio  of  22% S054.00 

•'    Balance    22%   12,320.00  By  Balance 

$17,640.00 

To  22%  Loss  and  eacpense 
of  liquidation 

First  month... $400. 00  $88.00 
Second  month.  750.00  165.00 
**    A  commission  $172.37 

B  commission  $172.37       344.74 
5%  of  share 

Cash  6,550.06 

Balance 5,172.20  By  Balance 


$2,110.51 

Cr. 
$20,000.00 

$20,000.00 


$17,640.00 
$17,640.00 


ff 


f« 


,22%  $12,320.00 


$12,320.00 

To  22%  Loss  and  expense 
of  liquidation 

Third   month . .  $340 . 00  $74 . 80 
•*    A  commission.. $87. 28 

*•    B  commission..  87.29  174.57 
5%  of  cash  share 

"    Cash   3,316.83 

•*    Balance    1,606.00  By  Balance 

$Si72.20 


$12,320.00 


.2j^  $Si7a.» 

$5,172.90 


I 


t 


i 


i 

t 


Practical  Accounting  Problems. 

To  22%  Loss  and  expense 

of  liquidation 
**    B   commission..  39.55  79.09 

Fourth   month. $110.00       $24.20 

*  A  commission.. $39. 54 

5%  of  cash  share 
"    Cash   1,502.71   By  Balance  

$1,606.00 

l> 
Dr. 

To  Drawings  $400.00  By  Capital  Account 

"    15%  of  loss  $8,000 1,200.00         investment 

"    Balance    8,400.00 

$10,000.00 
To  15%  Loss  and  expense 
of  liquidation 

First  month.  ..$400.00       $60.00 
Second  month.  750.00        112.50 
**    A  commission. $117. 52 

*  B    commission.  117.53        235.05 

5%  of  share 

*  Cash   4,465.95 

"    Balance    15%     3,526.50  By  Balance  

$8,400.00 
To  15%  Loss  and  expense 
of  liquidation 

Third   month.  .$340.00       $51.00 
"    A  commission.  .$59.51 
"    B    commission..  59.51        119.02 
5%  of  share 

"    Cash    2,261.48 

••    Balance    15%     1,095.00  By  Balance   

«.        «.  T  ,  $3,526.50 

To  15%  Loss  and  expense 
of  liquidation 

Fourth  month. $110. 00        $16.50 
**    A   commission.. $26. 97 
"    B   commission..  26.96         53.93 

5%  of  share 
"    Cash    1,024.57  By  Balance  

$1,095.00 


.22%  $1,606.00 


$1,606.00 

Cr. 

$10,000.00 

$10,000.00 


.15%  $8,400.00 


$8^400.00 


15%  $3,526.50 

$3,526.50 


.15%  $1,095.00 
$1,095.00 


173 


i 


Accmnimcy  Problems  and  Solutions. 

Problem  4 

It  will  be  noticed  that  in  soWng  this  problem  the  gross  profit  has  beca 
determined  in  the  trading  account  without  taking  into  consideration  the 
lelling  expenses— advertising  and  traveling.  The  assumption  in  this  case 
has  been  that  the  advertising  as  well  as  traveling  expense  have  resulted 
in  sales  both  for  the  house  and  lor  the  agency.  II  the  lacts  in  the 
problem  were  such  as  to  indicate  that  the  general  administration  expenses 
Mily  were  to  be  apportioned  between  trading  and  agency,  the  results,  of 
course,  would  be  entirely  different  The  gross  profit  would  then  be 
$416^93  and  there  would  not  be  any  net  profit  Irom  trading,  but,  on  the 
contrary,*  net  loss  on  trading  amounting  to  $1,545.62.  The  final  net  profit 
Irom  agency  and  trading  would,  of  course,  be  the  same,  $2,907.76. 

We  are  also  asked  in  the  problem  to  prepare  a  statement  which  would 
show  the  percentages  of  turnover  and  commission  that  the  total  expenses 
represent  By  dividing  the  turnover  $54,816.19  into  the  total  expense 
|io38o.24  we  find  the  percentage  of  turnover  to  be  I9.8485+*  By  dividing 
the  commissions  $1034100  into  the  total  expense  $10,889.24  we  get  a  per- 
centage of  commission  equal  to  105.2142+.  It  is  noticeable  that  no  resenre 
liaa  been  created  for  depreciation  of  buildings  or  furniture  and  fixture^ 
nor  has  there  been  created  any  reserve  for  bad  debts.  That,  of  course^ 
is  due  to  the  fact  that  the  problem  does  not  require  us  to  do  it 

While  the  problem  does  not  call  for  any  balance  sheet,  yet,  to  prove 
that  the  final  net  profit  is  correct,  we  prepare  the  balance  sheet  as  shown 
on  the  next  page. 

rroolem  3. 

This  problem  is  an  excellent  specimen  of  a  situation  with  which  the 
practising  accountant  is  frequently  confronted.  Business  men  when  en- 
gaged in  an  enterprise  other  than  their  regular  calling,  invariably  fail  to 
exercise  that  discretion  and  judgment  in  the  matter  of  details  which  they 
display  in  their  own  business,  and  the  problem  is  an  illustration  of  such 
neglect,  which  resulted  in  the  over-payment  of  dividends  for  which  the 
directors  are  liable  and  would  have  to  refund. 

The  solution  is  very  detailed  in  make-up  and  form  and  in  the  case 
of  a  mercantile  concern  would  set  forth  all  the  essential  facts  in  order  that 
the  operations  may  be  brought  down  to  a  percentage  basis  for  the  purpose 
of  comparison.  Here,  however,  while  these  requirements  are  unnecessary, 
the  solution  is  nev  jrtheless  instructive  and  will  afford  the  student  an  oppor- 
tunity of  condersing  the  various  statements  under  general  headings  and 
still  bring  out  the  points  which  detailed  statements  illustrate. 

The  inco-ie  and  expenditure  account,  which  term  is  deemed  here  more 
appropriate  than  profit  and  loss  account,  is  divided  into  six  sections.  The 
first  three  Aive  the  classification  of  revenue  and  expenditure  incurred  in 
conductinAhe  business,  resulting  in  a  total  profit  of  $228,300;  sections 
IV,  V  an«VI  show  the  distribution  of  profits  and  payment  of  dividends 
unearned  Jausing  a  deficit  of  $5i,7oa 

174 


Practical  Accounting  Problems. 
Problem  6. 

In  the  absence  of  details  and  specific  technical  points  of  the  laws  of 
Illinois  relating  to  insurance  companies,  the  solution  may  be  accepted  as 
correct.  The  only  respect  in  which  one  versed  in  the  laws  of  Illinois 
relating  to  insurance  companies  would  change  the  solution  would  be 
in  the  matter  of  the  reserve.  One  of  these  technical  details  which  are 
contrary  to  accountancy  practice,  is  the  fact  that  the  laws  do  not  permit 
a  company  to  carry  its  furniture  and  fixtures  as  an  asset  for  the  purpose 
of  calculating  the  reserve  but  they  must  be  charged  off  as  part  of  the 
expense  of  the  year  in  which  profits  are  earned. 

The  reserve  may  be  figured  as  follows:  For  all  business  written  for 
one  year  or  less  at  the  risk  of  any  year  50%  is  considered  as  being  earned 
(on  the  assumption  that  a  company  doing  a  regular  business  has  a  num- 
ber of  policies  having  only  one  day  to  run,  as  it  has  policies  that  have  run 
but  one  day),  50%  is  considered  as  being  unearned.  This  system  is  car- 
ried out  on  the  second  year's  business  on  the  same  equation  of  time,  viz., 
if  written  this  year,  at  the  end  of  the  year  the  proportion  earned  would  be 
as  6  months  is  to  24,  or  one-quarter  with  three-quarters  reserved;  and  at 
the  end  of  two  years,  as  18  months  is  to  24,  with  one-quarter  reserved. 

On  this  basis  the  unearned  premium  for  the 

First  year  would  be  one-half. $7,500.00 

Second  year,  three- fourths 13,875.00 

Third  year,  five-sixths 28,750.00 

Fifth  year,  nine-tenths 26,550.00 

Total  reserve  , $76,675.00 

This  is  merely  an  illustration  as  to  how,  given  all  the  details  of  the 
laws  of  the  various  states,  the  reserve  may  be  calculated. 


Problem  7. 

This  problem  tests  a  candidate's  ability  better  than  any  of  the  highly 
specialized  questions.  It  would,  perhaps,  have  been  better,  if  the  exam- 
iners had  made  it  compulsory.  The  question  calls  [in  (a)]  for  opening 
entries  and  balance  sheet  of  the  vendee  company.  The  latter  is  hardly 
necessary,  as  the  entries  disclose  the  assets  and  liabilities.  Such  require^ 
ment  only  adds  additional  labor  without  testing  the  candidate,  excepting^ 
perhaps,  for  the  purpose  of  the  make  up,  so  as  to  examine  his  technique. 

Though  the  solution  is  not  in  the  best  possible  form,  it  is  an  accurate 
answer  to  the  problem.  The  solution  should  show  the  subscription  to  the 
stock,  but,  in  the  present  case  this  cannot  be  done,  as  the  problem  is  silent 
about  it;  an  entry,  supplying  it  would  be  useless,  as  the  subscription 
could  have  been  for  a  part  of  the  capital  stock  only.     In  showing  the 

175 


I 


AccoMMtamy  Problems  and  Soluimis, 

proinoter's  profit  for  effecting  the  consolidation  (c)  the  answer  is  rather 
elaborate.  It  not  only  gives  the  profit,  but  traces  it  step  by  step  from  the 
start  to  the  finish. 

A  further  statement  could  be  shown  of  the  cash  transactions  of  the 
promoter,  which  would  reveal  the  fact  that  the  promoter  made  no  cash 
advances  whatsoever.  Not  until  he  had  succeeded  in  underwriting  the 
stock  did  he  pay  out  anything.  His  net  profit  is,  as  shown  above,  repre- 
sented by  the  loo  shares  of  preferred  stock  which,  from  the  wording  of 
the  question,  we  assume  he  retained,  or  sold  at  par,  his  gain  being  the 
same  in  either  case. 

The  problem  is  also  of  value  for  other  than  the  accounting  features 
involved.  It  illustrates  in  a  concrete  manner  the  method  of  financing 
large  enterprises  which  the  industrial  conditions  of  the  country  have 
called  forth  by  reason  of  its  growth,  population  and  wealth,  and  the  con- 
sequent necessity  of  combinations  for  the  purpose  of  economic  manage- 
ment  and  operation.  For  an  impartial  discussion  of  the  compensation  to 
the  promoters  of  these  gigantic  undertakings  and  the  risks  they  assume 
in  underwriting  the  flotations  of  these  companies,  the  student  is  referred 
to  the  book  on  "  Corporation  Finance,"  by  W.  H..  Lough,  and  similar 

wOrKs. 


The  solution  to  this  question  follows  the  sequence*' of  the  problem, 
namely,  in  showing  the  liquidation  of  the  firm  of  A,  B  and  C;  the  trad- 
ing account  is  prepared  first  in  order  to  show  the  gross  profit  realized 
on  the  trade  proper.  This  is  followed  by  the  interest  account,  this 
account  being  credited  for  the  interest  due  by  B  and  C,  and  charged  for 
the  interest  due  to  A,  The  profit  and  loss  account  shows  against  the 
gross  profit  carried  forward  from  the  trading  accounts,  to  which  the  un- 
expired insurance  is  added,  all  the  other  items  that  would  go  under  this 
section,  including  the  interest  balance  of  $105.00,  which  shows  a  net  profit 
for  allocation  among  the  partners  of  $2,817.  This  profit  is  allocated  in 
accordance  with  the  partnership  provision  of  A,  B  and  C.  The  partners' 
capital  accounts  which  follow  the  profit  and  loss  account,  as  rightly  they 
should,  show  the  respective  balance  of  each  partner  in  the  business.  This 
first  part  concludes  the  liquidation  of  the  firm  of  A,  B  and  C.  The  second 
part  shows  the  affairs  of  the  new  firm,  B,  C  and  D.  In  accordance  with 
the  partnership  agreement  of  the  new  firm,  B  withdraws  the  amount  of 
I32.51,  this  being  the  excess  of  $10,000,  as  per  his  account ;  C  invests  an 
additional  $31,20  to  make  up  the  $S,ooo  which  he  was  supposed  to  invest; 
and  D  invests  in  cash  one-fourth  of  the  capital,  namely,  $5,000.  The  cash 
account  is  given  in  order  to  show  the  cash  balance  on  hand  at  the  begin- 
ning of  the  partnership  of  B,  C  and  D.  It  includes  the  balance  of  the 
firm  of  A,  B  and  C,  and  the  additional  investments  of  C  and  D,  respect- 
ively. On  the  credit  side  it  shows  the  withdrawal  by  B,  and  also  the 
payment  to  the  estate  of  A,  leaving  a  hulance  of  $4,762.    The  balance 


176 


Practical  Accounting  Problems. 


^ 


) 


sheet,  which  follows,  shows  the  assets  of  the  new  firm  as  well  as  their 
liabilities,  including,  of  course,  the  bond  and  mortgage,  amounting  to 
$20,000,  payable  to  the  estate  of  A  in  five  yearly  installments,  and  verifies 
the  capital  of  the  new  firm. 

Problem  9. 

The  solution  gives  an  analysis  of  the  1906  transactions,  accounting  for 
the  cash  balance  of  June  i,  1907,  amounting  to  $832.14,  and  also  for  the 
deficiency  amounting  to  $5,067.72.  The  accounts  for  1907  show  the  result 
of  the  operation,  with  a  credit  balance  to  surplus,  amounting  to  $9,107.16, 
against  which  is  charged  the  deficiency  during  the  previous  year  $5,067.72, 
leaving  a  credit  balance  to  surplus  amounting  to  $4,039.44.  The  compara- 
tive balance  sheet  in  accordance  with  the  requirements  of  the  problem 
shows  all  the  assets  of  1907- 1908  as  well  as  the  liabilities  of  the  same 
periods,  with  the  respective  increases  and  decreases,  accounting  for  the 
results  shown. 

The  solution  given  probably  covers  more  than  the  problem  requires, 
but  from  the  point  of  view  of  the  practicing  accountant  it  is  not  more 
than  what  would  be  expected  of  him.  As  a  general  proposition,  the  fewer 
the  records  the  accountant  has  at  his  disposal  the  more  analytical  his  work 
has  to  be  in  order  to  be  enabled  to  substantiate  his  findings.  In  actual 
practice  the  various  statements  here  given  would  all  be  called  for  accom- 
panied with  schedules  and  exhibits,  and  the  candidate  submitting  his  solu- 
tion to  the  problem  as  it  is  here  given  would  have  no  difficulty  in  demon- 
strating that  he  has  had  actual  accounting  experience. 

Problem  10. 

In  solving  this  problem,  all  items  required  in  the  question  should  be 
given  in  one  of  the  statem  nts,  but  not  necessarily  repeated  in  all.  Thus 
the  item  of  common  stock  received  as  a  bonus  is  only  shown  in  Statement 
**B"  and  is  omitted  in  Statement  "A." 

It  will  be  noticed  that  while  Statement  "A"  shows  a  profit  of  $25o,ooaocii, 
it  includes  bankers'  own  share  in  the  syndicate.  To  this  share  there  is 
added  a  profit  of  $25,000.00,  the  difference  between  purchasing  price  and 
the  price  at  which  the  bonds  were  sold  to  the  syndicate.  Deducting  this 
sum  the  true  profit  would  only  be  $225,000.00. 

The  Bond  Interest  Account  is  self-explanatory.  As  the  bonds  were 
bought  and  sold  "with  interest,"  the  account  is  debited  for  the  intervening 
nine  days,  amounting  to  $123.29.  It  is  credited  for  all  interest  income,  in- 
cluding accretions,  not  due  as  yet,  showing  a  net  profit  after  one  year  of 
$362,5.^6.99. 

Statement  "B"  shows  the  participants'  accounts,  that  is,  the  final  bal- 
ance due  from  each  member  of  the  syndicate.  As  will  be  recalled  no 
member  of  the  syndicate  paid  in  money.    All  the  necessary  funds  were  ad- 


177 


Accountancy  Problems  and  Solutions. 

vanccd  by  the  bankers.  Tbe  partkipants'  accounts  have  been  debited  lor 
their  respective  allotments,  and  they  have  been  credited  for  respective 
sales,  the  difference  shows  balance  of  stock  on  hand  and  consequently  the 
•mount  which  they  owe  for  such  stock  remaining  unsold. 

The  Common  Stock  Account  tinder  Statement  "B/*  shows  the  respec- 
tive share  of  the  stock  bonus  given  to  each  member  of  the  syndicate,  in 
accordance  with  his  holdinf  in  the  syndicate. 

Statement  **C*  shows  first  the  bankers*  estimated  profit  on  the  unsold 
bonds,  the  latter  being  figured  at  925,  the  selling  price  to  the  syndicate. 

The  second  part  of  this  statement  shows  the  bankers*  profits,  earned 
and  estimated.    This  profit  is  composed  of  the  following: 


Profit  on  transfer  to  syndicate....... 

Bond  interest  (net) 

Estinuted  profit  on  unsold  bonds.... 


$250,000.00 
.  362,536.99 
■     15,237.67 

.$627,774.66 


In  figuring  these  profits  it  must  be  borne  in  mind  that  there  is  in- 
cluded $25,000,  mentioned  above,  representing  bankers'  own  participation; 
fiirthermore  that  no  interest  has  been  considered  on  the  bankers'  outlay 

for  purchase  of  bonds. 

The  cash  account  shows  all  cash  receipts  whether  for  the  sale  of  bonds 
or  receipts  of  interest,  as  well  as  payments  for  bonds  "with  interest."    The 

balance  of  cash  on  hand  belongs  to  the  bankers. 

The  final  statement  shows  the  bankers'  profit  to  have  been  $612,536.99^ 
in  which  figures,  however,  is  not  included  estimated  profit  on  unsold  bonds. 

The  cash  account  requires  some  explanation.  It  will  be  noticed  that 
although  the  problem  reads  that  on  February  i,  1908,  $6,000,000.00  worth 
of  bonds  were  sold  at  an  average  price  of  95  and  on  April  ist  $1,000,000.00 
worth  of  bonds  at  an  average  price  of  94.  the  student  may  be  led  to  sup- 
pose that  the  cash  book  would  show  the  actual  amounts  received,  which 
in  total  would  average  the  price  stated.  As  a  matter  of  fact,  the  amounts 
entered  on  the  cash  book  are  at  the  average  price  of  95  and  94  respect- 
ively, and  the  itemizing  of  the  two  lots  of  bonds  is  merely  to  show  the 
ratio  which  each  participant's  allotment  bears  to  the  total,  each  partici- 
pant's account  being  credited  with  his  proportion  of  the  bonds  sold. 

This  problem  is  a  fit  companion  to  Problem  7,  and  illustrates  the 
method  of  naarkcting  securities  of  industrial  corporations.  It  will  be 
observed  that  by  advancing  $9,000,000.00  in  cash  the  syndicate  was  able  to 
make  a  profit  for  the  year  of  less  than  7%,  that  is,  on  the  assumption  that 
the  unsold  bonds  will  yield  a  profit  similar  to  the  profit  shown  on  the  bonds 
already  sold.  As  an  offset  to  this  small  margin  of  profit,  the  participants 
of  the  syndicate,  however,  have  received  as  a  bonus  shares  of  common 
stock  of  the  Atlantic  Ocean  Bridge  G>mpany. 

178 


Practical  Accounting  Problems. 


( 


i 


, 


Problem   1 1 . 

With  regard  to  the  solution,  the  cash  book  is  self-explanatory  except- 
ing that  it  may  be  remarked  that  the  advances  to  incorporators  are  shown 
under  one  heading  and  are  supposed  to  be  posted  as  such  instead  of  in- 
dividually to  each  subscriber.  The  journal  entries  are  arranged  to  carry 
out  the  agreement  of  the  parties  in  exact  order,  and  the  explanations 
accompanying  each  entry  are  sufficient  to  give  the  reasons  for  the  records. 
It  will  be  noted  that  the  advances  to  the  incorporators,  as  well  as  the 
accountant's  fees,  are  charged  to  the  corporation;  a  procedure  which, 
although  not  required  by  the  problem,  can  easily  be  inferred.  Of  course, 
the  subscription  to  the  ten  shares  of  stock  of  each  incorporator,  as  well 
as  the  receipt  of  stock,  is  left  out  entirely  from  the  partnership  books,  and 
rightly  so,  as  they  are  not  pertinent  to  the  partnership  records.  It  may 
also  be  remarked  that  there  are  some  other  records  given  in  the  journal 
entries  which  do  not  pertain  directly  to  the  partnership  affairs,  yet  as  they 
are  required  in  the  problem  they  are  given  here.  The  ledger  accounts  are 
presented  for  the  purpose  of  showing  the  accounts  before  and  after  closing. 
The  heavy-faced  type  indicates  adjustment  or  closing  entries,  and  presents 
the  accounts  in  complete  form. 


Problem  12. 

In  this  problem  the  Manufacturing  and  Trading  Accounts  are  com- 
bined because  the  question  merely  requires  the  preparation  of  a  Manu- 
facturing and  a  Profit  and  Loss  Account.  As  it  would  not  be  proper  to 
show  sales  in  a  Manufacturing  Account,  the  two  (manufacturing  and  trad- 
ing) have  been  combined  in  order  to  determine  the  gross  profit  realized. 
It  is  rather  questionable  to  include  the  item  of  traveling  expenses  in  the 
Profit  and  Loss  Account.  This  item  represents  a  selling  expense  and 
should  be  included  in  the  Trading  Account ;  but,  as  the  question  does  not 
call  for  the  latter,  it  is  entered  in  the  profit  and  loss  account.  It  is  also 
questionable  whether  the  credit  of  factory  rent,  $3,000.00,  should  go  into 
the  first  section  of  the  Profit  and  Loss  Account.  When  the  profit  and  loss 
account  is  divided  into  sections,  that  item  would  appear  under  the  heading 
of  "  Income  from  Other  Sources."  The  Balance  Sheet  is  self-explanatory 
and  every  item  is  given  in  detail. 


Problem   13. 

It  is  required  in  this  Problem  to  show  the  Realization  Account,  as  well 
as  the  Profit  and  Loss  Account  of  the  amalgamated  firm.  Income  and 
Expenditure  Account  would  perhaps  be  a  more  correct  term  for  this  state- 
ment. The  term  Profit  and  Loss  Account  should  rather  be  used  in  con- 
nection with  trading  concerns,  while  Income  and  Expenditure  Accounts 
should  be  used  in  connection  with  non-trading  firms.    As  the  problem  cm- 

179 


: 


Accountancy  Problems  and  Solutions. 

phasizes  the  fact  that  the  firms  are  professional,  the  preparation  of  a  Profit 
and  Loss  Account  would  seem  inconsistent. 

It  will  be  noticed  that  the  division  of  the  net  profits  is  made  after  all 
preferentials,  in  accordance  with  the  wording  of  the  problem,  are  taken 
care  of  by  allowing  to  each  respective  firm  the  percentage  agreed  upon. 
The  accompanying  Capital  Accounts  of  the  members  of  each  respective 
firm  are  self-explanatory. 

rroblem  14. 

The  problem  is  well  selected  to  test  the  student's  knowledge  of  corpo- 
rate finance.  The  solution  consists  of  five  exhibits:  Exhibit  A  gives  the 
separate  Balance  Sheets  of  the  three  amalgamating  corporations;  Exhibit 
B  consolidates  the  previous  individual  Balance  Sheets,  increasing,  how- 
ever, the  capital  stock  by  $1,150,000.00,  for  which  a  new  asset.  Good  Will, 
is  created.  Exhibit  C  gives  us  a  condensed  Trading  and  Profit  and  Loss 
Account  of  every  concern  for  the  last  five  years,  the  figures  of  net  profits 
varying  absolutely  and  also  in  proportion  to  the  capital  stock,  the  corpora- 
tion A  showing  the  highest  profits  on  the  smallest  amount  of  capital  stock, 
in  accordance  with  the  requirements  of  the  problem. 

It  is  now  our  task  to  allot  equitably  the  capital  stock  of  the  new  com- 
pany. Exhibit  D  shows  the  percentage  of  net  earnings  on  the  capital  and, 
if  6%  is  considered  a  normal  rate  of  income,  the  excess  of  average  annual 
profits  may  be  considered  as  good  will  in  each  of  the  three  concerns.  Ex- 
hibit E  contains  the  distribution  of  the  capital  stock  of  the  new  corpora- 
tion; $350,000.00  are  allotted  in  exchange  for  the  old  shares;  the  balance 
is  distributed  in  the  ratio  which  the  good  will  of  each  of  the  merging  com- 
panies bears  to  the  total  good  will,  as  exhibited  under  D.  It  will  be  noted 
that  under  this  plan  the  corporation  A  receives,  comparatively,  the  highest 
allotment,  its  capital  being  only  one-half  of  B's  and  one-quarter  of  Cs,  but 
its  net  earnings  were  comparatively  also  higher. 

The  report  accompanying  the  solution  is  addressed  to  the  president  of 
the  company  and  states  the  result  of  the  investigation  and  the  views  of  the 
accountant. 

Problem  15. 

The  comments  to  this  problem  are  practically  given  in  the  introduction 
to  the  solution.  For  the  benefit  of  the  reader,  however,  we  append  another 
form  of  solution,  as  given  below: 

Account  Sales 

Sales    $45iOOO 

Charges : 

Claims   and   allowances 1,500 

Discount — 5% 2,250 

5,150 


Net  proceeds  to  shipper's  account, 


$39,850 


180 


Practical  Accounting  Problems. 


Balance  Sheet 


Cash $18,050      Creditors  $ii9CX} 

Customers  14,100      Capital  30,250 


$32,150 


$32,150 


Profit  and  Loss  Account 

Discount  lost   $400      Discount  gained   $2,250 

Expense    900      Trading  15,000 

Freight    700 

Balance    to    capital    ac- 
count    15,250 

$17,250  $17,250 


Capital  Account 


Cash   $15,000 

Profit  and  loss 15,250 

$30,250 


Problem   16. 

The  solution  to  this  problem  may  be  reached  by  three  methods.  The 
first  method,  given  under  Operation  A,  is  a  separate  valuation  of  princi- 
pal (i)  and  annuity  (2)  ;  the  two  added  give  the  present  value  of  the  bond. 
Under  (3)  we  find  the  amounts  of  interest,  income  rate  and  cash  rate,  and 
the  premium  $2,912.00  to  be  amortized  in  three  periods. 

The  Operations  B  and  C  arrive  at  the  same  result  as  A,  though  by  dif- 
ferent methods;  the  method  under  B  is  the  shortest  of  all.  The  cash  inter- 
est received  is  divided  into  income  and  surplus  interest  and  the  latter  only 
is  valued,  being  considered  as  an  annuity.  The  solution  winds  up  with  a 
schedule  of  amortization  showing  the  varying  yearly  net  income  and  the 
amortization  which  reduces  the  book  value  of  the  bond  to  par  at  the  date 
of  maturity.  The  division  of  profits  is  a  simple  matter  and  calls  for  no 
comments. 


I' 


Problem   17. 

In  stating  this  problem  an  effort  has  been  made  to  avoid  ambiguous 
terms  and  phrases.  In  working  out  the  problem  care  has  been  taken  to 
show  each  item  in  connection  with  the  operation. 

The  trial  balance  presented  in  the  problem  is  nothing  but  a  collection 
of  the  assets  and  liabilities  as  well  as  the  proprietorship  of  the  concern  on 
Jtme  30,  1907- 

181 


Accountancy  Probiefns  and  Solutions. 

On  operation  proper  the  corporation  has  earned  a  net  profit  of 
$28,991.00^  but  as  the  dividends  declared,  paid  and  unpaid,  amount  to 
|6o,ooo.oo,  it  leaves  a  deficit  for  the  year  amounting  to  $31,009.00,  which 
deficit  has  been  made  up  from  the  surplus  of  1907,  decreasing  that  surplus 
to  $35,366.00. 

The  important  principle  "Valuation  of  Inventory"  is  here  clearly 
shown,  inasmuch  as  the  market  price  of  the  raw  material  is  on  date  of 
inventory  $24.00  per  ton,  while  the  cost  of  the  material  is  stated  at  $22.00 
per  ton.  The  same  principle  is  illustrated  in  the  item  of  land,  which,  while 
its  present  value  is  estimated  at  $300,000.00,  is  nevertheless  carried  at  its 
original  cost  of  $270,000.00. 

It  will  also  be  observed  that  in  stating  the  payment  of  interest  on 
bonds  the  premium  is  deducted  from  such  interest.  This  is  based  on  the 
principle  that  the  premium  that  the  company  received  on  the  sale  of  the 
bonds  is  nothing  else  but  a  reduction  of  the  rate  of  interest,  and  therefore 
one-fiftieth  of  that  total  sum  of  permium  or  $400.00  is  deducted  each 
year  from  the  interest  charges. 

The  dividend  declared  on  preferred  and  common  stock  respectively, 
but  unpaid  at  the  present,  is  treated  as  a  liability.  According  to  the 
wording  of  the  problem  this  dividend  has  been  declared,  but  is  not  payable 
until  August,  and  hence  a  liability  at  the  present. 

It  will  be  noticed  that  the  current  reserve  for  bad  debts  ($7,716.00) 
has  been  deducted  on  the  asset  side  from  the  item  accounts  receivable. 
The  general  reserve   for   bad   and  doubtful  debts   accumulated  during 

previous  periods,  less  the  amount  of  actual  losses  from  bad  debts,  is  en- 
tered on  the  liability  side  of  the  balance  sheet.  The  result  would  be  the 
same  if  both  reserves,  current  and  general,  were  deducted  from  the 
accounts  receivable. 

Problem  ]S, 

In  the  solution  the  realization  and  liquidation  account  is  prepared 
in  the  ordinary  form,  showing  on  the  debit  side  the  assets  t*o  be  realized 
and  omitting  the  item  of  cash  as  this  is  already  realized.  Comparing 
tlie  total  of  this  heading  with  the  totals  of  the  headings  *'  Assets  Realized" 
and  "Assets  Not  Realized,"  we  find  a  difference  of  $103,500.00.  In 
this  balance  is  included,  of  course,  the  item  of  Materials  and  Supplies 
amounting  to  $95,000.00.  Eliminating  this  item  from  the  debit  side  (assets 
to  be  realized)  there  is  a  difference  of  $8,500.00,  which  represents  the 
loss  on  the  realization  proper,  viz.:  $8,000.00  by  reason  of  bad  debts 
written  off,  and  $500.00  by  reason  of  discounts  and  allowances  on  custo- 
mers* accounts  prior  to  January  i,  1908.  In  the  problem,  however,  this 
difference  was  not  carried  out,  but  the  supplementary  charges  and  th© 
supplementary  credits  respectively  have  been  added  and  the  net  result 
of  the  trustee's  operation  shown  in  one  sum. 

In  the  trustee's  operations  proper,  under  "Supplementary  Charges*' 
and  "Supplementary  Credits."  is  shown  the  result  of  his  operations,  viz.: 
To  the  total  under  supplementary  charges,  $356,695.00,  is  to  be  added 


Practical  Accounting  Problems. 

the  item  of  $3,000.00  for  materials  consumed  from  the  inventory,  making 
a  total  of  $359,695.00.  Against  this  the  total  of  supplementary  credits, 
after  all  the  deductions  are  made,  amounts  to  $338,135.00.  That  gives 
a  loss  on  the  trustee's  operations,  of  $21,560.00.  If  we  add  to  this  the 
$8,500.00  lost  on  the  realization  proper,  we  get  a  total  of  $30,060.00, 
as  shown  in  the  last  item  on  the  credit  side  of  the  realization  account. 
Under  payments,  the  problem  gives  purchases  of  materials  and  supplies 
as  $98,000.00.  However,  as  under  the  item  of  notes  given  to  creditors 
the  amount  of  $180,000.00  is  given,  and  the  renewals  are  only  $110,000.00 
we  must  conclude  that  $70,000.00  worth  of  material  was  bought  on  notes; 
hence,  the  figure  of  $168,000.00  under  purchases  of  materials  and  supplies, 
in  the  Supplementary  Charges. 

The  balance  sheet  proves  the  condition  shown  by  the  realization 
and  liquidation  account.  The  item  of  cash  is  determined  by  adding  to 
the  difference  found  by  subtracting  the  payments  from  the  receipts,  the 
balance  of  $450.00  on  hand  at  the  beginning  of  the  trusteeship. 

The  item  of  notes  receivable  is  found  by  subtracting  the  cash  amount 
received,  $13,500.00,  from  the  item  $20,000.00,  "notes  received  from 
customers."  In  the  same  way  the  items  of  accounts  receivable,  notes 
payable  and  accounts  payable  are  determined. 

The  items  "accrued  interest"  and  "accrued  taxes,"  although  charged 
as  expenditures  for  the  trusteeship,  have  not  as  yet  actually  been  paid 
and  are  treated  as  deferred  liabilities. 


Problem   19. 

The  transactions  of  the  Association  and  of  the  Club  are  numerous  but 
presented  clearly  so  that  the  solution  is  not  difficult  and  requires  no  expla- 
nation. The  journal  of  the  association,  in  which  also  the  cash  transactions 
are  entered,  contains  a  detailed  record  of  its  incorporation,  its  deal  in  real 
estate  and  of  the  mortgage.  The  journal  of  the  Fairview  Club  contains 
the  records  of  its  organization  by  the  association  and  its  transactions,  viz., 
dues  received,  assessment  of  members  and  expenses,  resulting  in  a  de- 
ficiency of  $4,500.00.  All  entries  are  posted  to  the  ledgers  and  the  final 
Balance  Sheet  proves  the  correctness  of  our  books. 


Problem  20. 

A.— On  closing  entries  in  books  of  Jones  &  Jackson : 
By  drawing  proper  ledger  accounts,  it  may  readily  be  seen  that  all  of 
the  old  accounts  in  the  books  of  Jones  &  Jackson,  as  well  as  the  new  ones 
necessary  for  the  adjustments,  are  now  closed.  But  two  items  deserve 
special  mention,  viz.,  the  drawing  account  and  the  division  of  good  wilt 
As  it  is  not  usual  for  stockholders  to  have  drawing  accounts  in  their  com- 
panies, or,  in  cases  of  this  kind,  to  treat  debit  balances  in  such  accounts 
as  assets,  it  appeared  desirable  to  close  them  into  their  corresponding 

183 


Accountancy  Problems  and  Solutions. 


capital  accownts.  Regarding  good  will,  the  partnership  law  provides  that 
all  profits  of  a  co-partnership,  in  the  absence  of  a  special  agreement,  arc 
to  he  divided  equally  between  the  partners.  Good  will  represents  a  profit 
on  sale  to  the  corporation;  hence,  the  equal  division  shown. 

B.— On  opening  entries  in  the  hooks  of  the  Consolidated  Manufacturing 
Company : 

The  "  good  will "  item  of  $714000  among  the  assets  of  the  Independent 
llimifacturing  Co.  consists  of  the  original  item  as  per  balance  sheet  sub- 
mitted ($50,000),  plus  the  item  of  good  will  created  by  the  consolidation 
(|664,ooO') . 

"Reserve  for  Working  Capital— 150,000/*  It  is  true  that  no  definite 
value  can  be  assigned  to  the  treasury  stock  contributed  by  the  stock- 
holders, for  this  value  depends  upon  the  future  price.  But  as  we  can 
easily  adjust  the  amount  by  subsequent  entries  at  the  time  when  the  stock 
is  disposed  of,  the  objection  just  raised  need  not  be  considered  any 
further. 

Inasmuch  as  only  $20,000  was  realized  for  $50,000  of  stock,  the  reserve 
account  or  working  capital  has  suffered  a  decrease  of  $30,000,  hence  the 
•djustment,  previously  referred  to,  is  now  made. 

A  very  interesting  question  is  raised  by  the  next  transaction  involving 
the  disposal  of  bonds  at  a  discount.  Undoubtedly,  had  no  stock  been 
offered  as  a  bonus,  less  than  90  would  have  been  realized.  Why,  then, 
should  not  the  value  of  the  stock  (say  about  $30,000)  be  charged  to  Dis- 
count on  Bonds  Account,  leaving  only  the  balane  ($45,000)  to  reduce  the 
amount  of  reserve  for  working  capital?  I  think  this  latter  solution  the 
better  one,  though  perhaps  less  usual.    The  entry  becomes : 

Cash ....$450,000 

Discount  on  bonds. 80,000 

Reserve  for  working  capital .,    4S»ooo 

To  first  mortgage  bonds  payable....  $500,000 

Treasury  stock   •  •  75iOOO 

If  this  suggestion  be  adopted  a  few  changes  would  be  necessary  in  the 

inal  'balance  sheet,  viz., 

Discount  on  bonds,  debit $80,000 

Reserve  for  working  capital,  credit 7S»ooo 

In  case  the  bonds  were  issued  for  some  specific  construction  purpose, 
Construction  Account  might  be  charged  instead  of  Discount  on  Bonds  Ac- 
count, as  shown.  In  either  case,  the  item  should  not  be  carried  as  an 
tsset  indefinitely,  but  should  gradually  be  reduced. 

Problem  21. 

The  problem  is  practical  and  interesting  from  every  point  of  view  and 
contains  enough  matter  not  only  to  test  the  candidate's  knowledge  of  the 
subject  matter,  but  also  to  see  how  far  he  will  go  in  anaylsis  of  similar 
propositions,  and  what  his  conclusions  would  be. 

1E4 


Practical  Accoimiiyii;  Problems. 

The  solution  supplied  here  is  purely  technical.  The  first  Balance  Sheet 
gives  all  assets  and  liabilities  in  detail ;  the  condensed  Balanced  Sheet  con- 
tains the  same  assets  and  liabilities  by  groups,  and  the  securities  pledged 
and  held  in  escrow  are  deducted.  There  is  the  same  distinction  also  be- 
tween the  two  Income  Accounts,  the  first  one  giving  the  various  sources  of 
income  and  the  various  expenditures  in  detail,  while  the  second  statement 
proceeds  by  groups  of  accounts ;  the  results  are,  of  course,  identical. 

It  will  be  noticed  that  the  problem  calls  also  for  a  written  report  of 
the  financial  problems  presented  by  the  question;  he  would  have  to  call 
the  attention  of  his  client  to  the  various  things  suggested  by  a  close  inves- 
tigation, viz.,  a  comparison  of  the  inefficiency  of  the  working  assets  against 
the  current  liabilities ;  the  inefficiency  of  the  power  plant,  with  suggestions 
as  to  the  possible  savings  in  fuel  cost  by  the  installation  of  more  modem 
machinery;  discussion  of  the  overcapitalization  of  the  proposition;  ref- 
erence to  the  lack  of  provision  for  depreciation;  the  possibilities  of  a 
receivership  or  of  a  reorganization  in  the  light  of  the  possible  inability  to 
pay  the  fixed  charges  and  the  current  obligations  out  of  current  net 
earnings. 

Problem  22. 

This  problem  is  rather  simple.  The  principles  involved  are  the  correct 
result  as  to  profits  and  the  relations  of  the  partners  to  each  other.  The 
Profit  and  Loss  Account  is  so  arranged  as  to  show  first  the  actual  result; 
it  is  then  closed  out  by  charging  each  partner  for  his  share  of  loss  and 
crediting  the  Profit  and  Loss  and  crediting  the  account  for  the  total 

The  partners'  capital  accounts  show  the  relation  of  each  partner  to 
the  other.  A  and  C  have  each  overdrawn  their  accounts,  respectively. 
The  former  to  the  extent  of  $1,187.50;  the  latter  to  the  extent  of  $52^ 
making  a  total  of  $1,712.50.  This  amount  is  due  to  B,  as  his  account 
shows  a  greater  investment  than  the  loss  and  drawings  amount  to. 


Problem  23. 


The  solution  to  the  problem  consists  of  three  exhibits;  namely,  the 
operating  account,  property  account  and  the  Balance  Sheet.  The  operating 
account  is  arranged  in  such  a  form  as  to  show  on  the  debit  side  the  orig- 
inal cost  of  the  property,  plus  the  selling  and  administration  expenses. 
Against  this  the  sales  are  shown  on  the  credit  side,  resulting  in  a  loss  for 
the  year  1906  amounting  to  $8,452.82.  This  loss,  in  accordance  with  the 
wording  of  the  problem,  is  carried  to  the  property  account. 

By  adding  up  the  interest  on  the  capital  invested  in  the  lots,  as  well 
as  the  losses  sustained  during  1906,  and  distributing  it  over  the  remain- 
ing lots  unsold  at  the  beginning  of  1907  the  book  value  per  lot  is  shown 
to  be  $426.01.  We  therefore  debit  the  operating  account  in  1907  for  the 
book  value  of   160  lots  sold  at  $426.01,  to  which  is  added  the  selling 

185 


Accountancy  Problems  and  Solutions. 

md  administration  expenses,  making  a  total  of  $83,8i4-85-  Against  this 
18  shown  on  the  credit  side  the  amount  realized  from  the  sales  of  i6o 
tots,  also  the  interest  received,  plus  that  which  is  accrued  by  the  end  of 
the  period,  making  up  the  sum  of  $83,361.00.  We  also  add  on  the  credit 
side  the  transfer  of  $4,161.60  from  the  reserve  for  earnings  on  invest- 
ment, which  represents  the  credit  in  current  earnings  for  the  amount 
burdened  on  the  property  account,  realized  by  sales  of  160  lots  at  the 
burdened  figure  of  $26.01.  The  total  credit  side  then  shows  $87,522.60. 
leaving  a  balance  of  $3,70775  which  represents  the  profit  for  1907  and 
which   is  transferred  to  the  property   account   in   accordance   with   the 

wording  of  the  problem. 

The  reserve  for  earnings  mentioned  before  represents  the  annual 
charges  made  to  the  property  account  for  interest  on  capital  remaining 
invested,  at  the  rate  of  4%  Per  annum,  plus  any  deficit  shown  in  any 
year.  The  offsets  against  it  are  profits  realized,  also  any  transfer  to  the 
property  account  by  reason  of  realizing  any  portion  of  the  amount  bur- 
dened to  the  latter  account. 

The  property  account  shows  on  the  debit  side  the  purchase  of  the  prop- 
erty, against  which,  on  the  credit  side,  is  entered  the  record  of  the  sales  at 
cost     The  remaining  balance  is  carried  forward  to  the  next  period,    in 
1907  the  account  is  also  charged  with  the  interest  on  the  original  invest- 
ment, and  the  loss  sustained  on  operation  in  1906,  agamst  which  the  sale— 
at  cost-is  credited,  the  balance  being  carried  over  for  the  next  period. 
To  this  balance  is  added  again  the  interest  on  the   remainmg  balance 
($376,000)  while  on  the  credit  side  is  entered  the  amount  of  profit  real- 
ized on  the  operations  of   1907,  resulting  in  a  balance  to  the  property 
account  of  $343,623-47.     This  balance  represents  the  book  value  of  the 
780  lots  remaining  unsold  on  January   i,   1908.     The  balance  sheet  is 
arranged  to  show  the  exact  condition  of  affairs  and  therefore  the  amount 
set  aside  as  a  reserve  for  earnings  on  investment  is  deducted  from  the 
property  account,  and  results  in  a  balance  to  that  account  of  $312,000, 
which,  of  course,  is  the  original  cost  of  the  780  lots  remaming  unsold. 
This  results  in  a  deficit  of  $4475-07  and  is  so  shown. 

Problem  24. 

The  solution  to  this  problem  covers  more  than  is  required  in  the  ques- 
tion which  only  calls  for  a  statement  of  profit  and  loss  and  income,  while 
the  solution  in  addition  to  the  profit  and  loss  statement  gives  also  the  bal- 
ance sheet,  showing  the  financial  condition  of  the  firm,  and  at  the  same 
time  verifying  the  results   shown  on  the  income  and  profit   and  loss 

■tsitcm  ent 

It  will  be  noticed  that  no  provision  for  the  depreciation  of  the  fixed 
properties  has  been  made,  nor  has  any  reserve  been  set  aside  for  bad  and 
doubtful  debts,  for  two  reasons;  first,  because  the  values  of  the  fixed 
property  represents  inventory  valuations,  and  second,  because  the  problem 
does  not  require  any  provision  to  be  made. 

186 


t 


Practical  Accounting  Problems. 

Otherwise  the  grouping  in  the  profit  and  loss  statement  calls  for  no 
comments;  the  gross  sales  are  decreased  by  the  amounts  of  items,  inti- 
mately connected  with  sales,  giving  net  sales,  from  which  the  total  cost  of 
manufacture  is  deducted.  The  result  is  gross  profits ;  if  we  subtract  from 
it  the  selling  expenses  we  get  the  selling  profit.  From  here  follows  the 
actual  profit  and  loss  statement,  the  foregoing  being  rather  in  the  nature 
of  a  manufacturing  and  trading  section.  To  the  net  profit,  which  is  ob- 
tained after  deducting  the  administration  expenses  and  other  charges,  we 
add  the  former  surplus,  thus  giving  us  the  total  amount  available  for 
distribution. 

Problem  25. 

Regarding  the  solution  to  this  problem,  we  think  that  it  covers  a  good 
many  points  which  are  not  required  by  the  question,  and  on  the  other  hand 
omits  certain  conditions  which  should  be  shown.  In  addition,  therefore, 
we  submit  another  solution  which  we  think  complies  better  with  the  con- 
ditions given  in  the  problem: 

STATEMENT 

Showing  the  Settlement  between  partners  at  December  31,  1909 

Assets: 

Cash $804.20 

Accounts  receivable 2,240.00 

Investment,  original  value $12,000.00 

Less  shrinkage.  ^  of  $2,700.00 2,025.00  9.975-00 

Commissions  receivable  (earnings  on  future  shipments,  mini- 
mum guaranteed) 15,000 .  00 

$28,019.20 

Profits:  — 

Partners  withdrawals: 

A $2,000.00 

B , 10,370.00 

c 3.350^ 

.  .  $15,720.00 

Assets  remaining 28,019  •  20 

^ $43,739-20 

Deduct  original  investment 20,000.00 

Net  profit 23,739.20 


187 


Accountancy  Problems  and  Solutions. 


Practical  Accounting  Problems. 


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Accomitatwy  Problems  and  SduHons. 

■■hi  'fl    'V  11'%  J*" 

Problem.  Zo. 

In  solving  the  problem  the  royalties  accrued  are  regarded  as  a  reduc- 
tion on  the  purchase  price.  The  question  reads:  **  The  patent  was  subject 
to  royalty  rights  granted  to  the  Novelty  Company,  which  terminated  at 
date  of  purchase.  All  accrued  royalties  were  to  pass  with  patent  and  no 
royalty  rights  were  granted  by  the  Patent  Specialty  Company."  The  roy- 
alties mentioned  in  the  problem  as  having  been  received  and  accrued  to 
December  31,  1907,  must  have  been  those  which  were  accrued  on  August 
20,  1907,  and  therefore  form  a  reduction  on  the  purchase  price. 

It  is  rather  questionable  whether  the  complementary  credit  to  real 
estate  donated  should  be  "  surplus."  This  company  has  done  no  business 
as  yet  and  therefore  has  no  profits  for  distribution  as  dividend,  which  is 
possible  by  means  of  the  credit  balance  that  is  shown  to  surplus.  A  better 
method,  perhaps,  would  be  to  credit  it  to  a  "reserve"  account,  properly 
car-marked. 

There  is  no  account  except  "Organization  Expenses"  to  which  the 
insurance,  salaries,  etc.,  could  have  been  charged.  As  there  are  no  opera- 
tions as  yet,  all  the  expenses  incurred  are  for  the  purposes  of  organization ; 
therefore  a  charge  to  this  account  is  proper. 


rrobleiii  z/. 


The  solution  provides  that  a  portion  of  the  interest  collection  be  cred- 
ited to  the  Bond  Account  as  part  of  the  principal,  so  that  at  maturity  the 
balance  of  the  Bond  Account  will  equal  the  face  value  of  the  security. 
The  problem  does  not  require  this  specifically,  but  in  order  to  render  a 
scientific  solution  to  the  question,  the  premium  paid  at  purchase  of  the 
bonds  is  amortized  out  of  the  interest  receipts.  The  principle  involved  is 
that  bonds  as  a  rule  are  never  perpetual,  nor  do  bonds  run  for  less  than 
one  year ;  moreover,  the  purchase  price  is  never  the  same  as  the  face  value 
of  the  security,  the  bond  is  bought  either  at  a  premium  or  at  a  discount 
If  at  a  premium  as  in  this  problem,  a  portion  of  the  semi-annual  interest 
received  must  be  regarded  as  part  payment  of  the  principal  and  a  reserve 
set  up  in  a  separate  account,  or,  as  treated  in  the  solution,  deducted  di- 
rectly from  the  bond  itself.  The  Analytical  Single  Column  Schedule  illus- 
trates the  arithmetical  operation  involved,  the  period  being  short  the 
process  is  comparatively  simple,  but  if  the  security  does  not  mature  for  a 
great  many  years,  the  arithmetical  operation  is  somewhat  complicated  and 
logarithmetic  tables  have  to  be  employed  in  the  solution. 

In  instances  where  the  securities  are  purchased  at  a  discount,  the  cash 
interest  received  is  regarded  as  only  a  portion  of  the  yield,  the  remainder 
being  deferred  until  the  maturity  of  the  security,  in  which  case  the  Bond 
Account  is  debited  and  the  Interest  Earned  Account  credited. 

190 


1  u 


1; 


I 


Practical  Accounting  Problems. 

Problem  28. 

Although  $7,000  has  been  received  from  the  Insurance  Company  for 
the  stock  in  hand  at  the  time  of  the  fire  it  has  not  been  credited  to  Insur- 
ance Adjustment  account.  It  is  assumed  that  same  was  credited  to  Sept 
sales  not  allocated. 

The  question  states  that  cash  was  received  from  September  sales 
amounting  to  $13,500.  Allowing  $7,000,  as  above,  there  remains  a  balance  of 
$2,675  to  be  debited  to  some  account.  This  might  have  been  debited  to 
Reserve  for  bad  debts,  but  as  the  balance  to  credit  of  the  account  is 
equal  to  over  6%  of  the  accounts  receivable  outstanding  it  is  hardly  likely 
that  this  could  have  been  done.  It  may  have  been  written  off  the  Profit 
and  Loss  Surplus,  but  this  course  would  have  been  unusual.  It  is  there- 
fore assumed  that  the  situation  was  as  follows:  September  sales  records 
have  been  destroyed,  yet  there  is  a  figure  in  the  trial  balance  under  this 
heading.  It  is  therefore  most  likely  that  the  method  of  the  Richardson 
Engraving  Company  was  to  debit  the  customer  at  the  time  the  charge  was 
incurred  and  to  credit  the  appropriate  revenue  account  at  the  end  of  each 
month.  The  balance  of  accounts  receivable  would  thus  include  the 
amounts  unpaid  for  September  sales  as  well  as  all  other  unpaid  terms. 
This  is  further  borne  out  by  the  fact  that  the  allocated  sales  were  $176,950 
and  unallocated  sales  $23,175,  while  the  outstandings  from  customers 
amount  to  $19,640  consisting  of  $16,965  on  allocated  sales,  and  $2,675  o^ 
unallocated  sales  or  about  9  and  11%  respectively.  As  the  unallocated 
sales  are  of  more  recent  occurrence  it  seems  reasonable  to  assume  that 
these  percentages  are  accurate  and  support  the  supposed  methods. 

It  will  be  noticed  that  the  credit  side  of  the  trial  balance  given  adds 
$293,820  not  $292,820.  Candidates  were  instructed  to  reduce  one  of  the 
credit  items  by  $1,000  and  we  have  therefore  reduced  the  unallocated  Sep- 
tember sales  by  this  amount 


Problem  29. 

This  problem  is  a  fair  specimen  of  the  work  set  for  the  candidates  at 
the  Intermediate  Examinations  of  the  Institute  of  Chartered  Accountants. 
The  problem  is  exceedingly  simple,  in  fact,  much  more  simple  than  the 
corresponding  problems  set  by  the  New  York  State  Board  of  Regents  for 
candidates  taking  examinations  in  Advanced  Bookkeeping.  The  solution 
consists  of  the  Profit  and  Loss  statement,  Journal  entries  and  the  part- 
ners' drawing  and  capital  accounts,  which  is  more  than  what  one  wouM 
be  led  to  assume  from  the  wording  of  the  question.  In  a  problem  of  this 
kind,  bearing  in  mind  that  the  candidate's  general  ability  is  tested,  the 
inclusion  of  all  the  statements  showing  properly  the  apportionment  of  the 
profits,  is  advisable.  The  problem  is  more  of  a  test  in  accounting  tech- 
nique than  anything  else. 

191 


\\\f. 


Accountancy  PmMems'  and  Soiwiwns, 
rbyem  30. 

An  accurate  solution  to  this  problem,  which  should  correspond  in  every 
detail  to  the  official  solution,  would  be  probably  the  result  of  mere  chance 
rather  than  hard  work,  for  the  reason  that  many  little  and  intricate  de- 
tails which  are  of  sufficient  importance  to  change  the  aspect  of  some  of 
the  statements  and  which  would  be  easily  apparent  to  the  man  engaged 
on  the  work  itself,  are  either  left  out  of  the  problem,  or  are  not  suffi- 
ciently emphasized  to  assist  the  candidate  to  an  absolutely  accurate  solu- 
tion. Illustrations  in  point  are  the  necessity  for  arbitrarily  dividing  the 
inventory  at  the  beginning  to  give  the  problem  some  semblance  of 
plausibility,  and  a  further  improbability  is  the  absence  of  inventory  o£ 
coal  and  lumber  at  the  close  of  the  period,  and  such  similar  details.  With 
this  qualification,  however,  the  solution  here  submitted  is  correct  in  every 
phase  of  it,  and  the  candidate  presenting  such  a  paper  would  have  the 
satisfaction  of  knowing  that  he  has  proved  to  the  examiners  his  ability  as 
an  experienced  accountant.  The  difficulty  of  the  problem  lies  chiefly  in  its 
length  and  in  the  numerous  conditions  involved  while  a  candidate  for 
the  degree,  pressed  for  time  and  desirous  of  presenting  a  neat  paper,  is 
likely  to  overlook  some  of  the  minor  requirements. 

The  accompanying  journal  entries  are  not  called  for  in  the  problem, 
toot  are  given  so  as  to  show  the  complete  entries  on  the  books  of  the 
corporation. 

THE  GUNSAULUS   CORPORATION 

LUMBER  DEPARTMENT   BOOKS 

JOURNAL  ENTRIES 

The  entries  which  follow  are  made  in  accordance  with  an  agreement 
made  this  day  by  and  between  The  General  Manufacturing  Co.,  Inc.,  and 
The  Gunsaulus  Corporation,  and  others,  whereby  The  General  Manufac- 
turing Co.,  Inc..  agrees  to  take  over  the  lumber  business  of  this  company 
(with  certain  reservations  and  npon  certain  conditions)  as  by  reference 
to  the  particular  agreement  will  more  fully  appear : 

General  Manufacturing  Company 1469,646.81 

To  Sundry  Assets  (transferred) $469,646.81 

Sundrv  Liabilities  (assumed) 11 ,496 .  24 

To  General  Manufacturing  Company 11 ,496 .  24 

Stepltis ■ 82,982 .  92 

'Losses  sustained  and  allowance  made  in  .sale 

of  lumber  business — 

(To  Sundry  Assets) 82.982 .92 

Allowance  made  from  book  value  of  Mill  Plant  74,982 .  92 

Accounts  Receivable  UncoUectihle 8,000.00 

Deficiency - 39,986 .67 

Net  excess  of  losses  over  gains. 

TOiSmiplus 39.986-67 

To  close  the  latter  account. 

Xotb: — Tb«  entries  to  be  tciiilc  upiMi  ibt  iMwIct  al  tbe  General  :li«ralacturiiig  Co., 
.Rock  Lttmber  Co.,  Severn  River  Lumber  Co.,  are  not  fiveti,  since  they  a,rc  not  aalced 

■for. 

193 


i^ 


!f 


Practical  Accounting  Problems. 
Problem  31. 

This  problem  is  from  the  English  Final  Examination  Papers  of  the 
Institute  of  Chartered  Accountants,  held  in  December,  1910.  The  diffi- 
culties presented  by  the  problem  are  rather  slight  compared  with  the 
examination  papers  of  the  different  state  universities,  yet  the  problem  is 
not  devoid  of  pitfalls,  which  lie  principally  in  the  calculations  involved 
for  the  conversion  of  the  currencies.  The  rate  of  exchange  is  given  as 
2s.  4d.  to  the  dollar.  The  student  with  only  the  problem  before  him  is 
apt  to  jump  to  the  conclusion  that  the  rate  of  exchange  is  a  misprint,  and 
thereby  wastes  considerable  time  in  trying  to  find  a  common  item,  in  the 
two  statements  given,  in  order  to  verify  the  rate.  The  superiority  of  the 
English  papers  lies  principally  in  the  test  they  present  of  the  candidate's 
general  education  and  intelligence,  which  is  wanting  in  a  great  many  of 
the  American  papers.  The  heading  of  the  problem  reads:  Trial  Balance 
of  the  London  Office  of  a  Rubber  Company.  Now,  rubber  is  not  raised 
in  any  part  of  the  United  States  or  any  of  its  possessions  where  the 
United  States  coins  circulate;  hence,  the  inference  must  be  drawn  that 
the  dollar  sign  stands  for  Mexican  currency,  which  is  quite  correct. 

The  statements  presented  in  this  solution  fully  cover  all  the  require- 
ments, and,  but  for  the  calculations  involved  in  the  converting  of  the 
moneys,  the  problem  is  easily  solved. 


Problem  32. 

Though  simple,  the  problem  tests  effectively  the  student's  knowledge 
of  mining  accounts.  The  solution  shows  the  classification  of  the  revenue 
accounts  so  as  to  bring  out  (i)  the  cost  of  mining,  (2)  the  cost  of  prep- 
aration, (3)  gross  profits,  (4)  net  profits,  (5)  cost  per  ton,  and  (6)  net 
earnings  per  ton.  In  the  Balance  Sheet  all  fixed  assets  are  grouped  under 
the  heading  of  Plant  Accounts,  and  are  placed  first,  being  the  most  im- 
portant item  in  the  statement.  Among  the  deferred  assets  there  is  a  bal- 
ance of  the  Royalty  account,  part  of  which  is  charged  to  the  Profit  and 
Loss  account  (132,300  tons  @  20c),  the  remainder  being  carried  as  an 
asset  to  the  next  period. 

Problem  33. 

In  solving  this  problem,  the  interpretation  is  based  on  the  wording  of 
the  problem.  As  there  are  only  eight  subscribesr  to  the  Capital  Stock 
of  the  Company,  a  controlling  account,  under  the  heading  "  Subscribers/' 
is  debited  for  the  full  amount  of  the  subscribed  stock,  and  the  Capital 
Stock  account  is  credited.  It  will  be  noticed  that  the  initial  memorandtim 
dealing  with  the  legal  existence  of  the  Company,  etc.,  is  embodied  in  the 
explanatory  matter  to  the  opening  entry  in  the  Journal  of  the  United 
Manufacturing  Company. 


,! 


Accountancy  Problems  and  Solutions, 

No  other  entries  are  given  affecting  the  United  Manufacturing  Com- 
pamj  that  cannot  be  properly  called  opening  entries.  Thus  it  will  be  seen 
that  while  accrued  wages  and  dividend  payable  appear  on  the  liability 
side  of  the  Balance  Sheet  of  the  United  Manufacturing  Company,  no 
entry  is  made  to  provide  for  that. 

The  Consolidated  statement  is  so  arranged  as  to  prove  and  agree  with 
the  results  shown  in  the  Balance  Sheet. 

The  percentage  table  is  prepared  after  adjusting  all  possible  inventories, 
etc.    In  other  words,  as  the  heading  indicates,  consumption  is  the  basis. 


Problem  34. 

The  solution  to  this  problem  will  be  of  interest  to  the  reader  on  ac- 
count of  the  difference  in  treatment  of  some  of  the  items.  Thus  it  will  be 
noticed  that  freight  and  express  outward  is  deducted  from  sales  rather 
than  listed  in  some  other  section  of  the  statement.  It  will  also  be  noticed 
that  depreciations,  on  buildings  as  well  as  on  machinery,  are  charged  in  a 
section  prior  to  determining  cost  of  goods  produced.  In  other  words, 
considering  it  an  element  in  the  cost  of  goods  manufactured.  This  the 
reader  will  find  to  be  in  opposition  to  some  of  the  arguments  recently 
advanced  by  accountants  that  such  items  be  excluded  in  determining  cost 
of  goods  manufactured.  There  are  a  number  of  other  items  that  the 
reader  will  find  worth  while  to  analyze  carefully  and  contrast  them  with 
similar  ones  in  other  solutions,  thus  benefiting  himself  by  becoming 
familiar  with  all  possible  views. 

Problem  35. 

The  wording  of  this  problem  is  not  quite  clear.  It  reads  "...  the 
insured  claims  his  loss  is  42}^%  of  the  prime  cost  of  his  goods;  .  .  . 
the  percentage  claim  is  adjusted  at  that  figure."  It  would  be  a  rather  diffi- 
cult task  to  determine  the  total  prime  cost  in  this  case,  and  if  determined 
it  would  not  be  equal  to  the  percentage  given  (421/2).  The  only  possible 
interpretation  of  the  meaning  of  prime  cost  in  this  case  is  that  it  em- 
braces, in  addition  to  the  usual  elements,  raw  materials  and  productive 
labor,  also  manufacturing  expenses.  It  is  on  that  basis  only  that  the  prob- 
lem can  be  solved,  and  that  is  the  method  adopted  in  the  solution. 

Another  element  which  the  problem  does  not  mention  is  that  of  de- 
preciation. As  no  provision  has  been  made  for  that  item  we  take  the 
arbitrary  percentage  of  10%  on  the  declining  balance,  and  by  means  of 
this  determine  the  amount  of  the  adjusted  loss. 

As  this  is  a  very  important  and  at  the  same  time  instructive  problem 
we  present  another  solution.  Though  the  second  solution  arrives  at  the 
same  results  as  the  first  one,  and  though  the  value  of  the  assets  destroyed 
is  here  also  determined  by  analysis  and  comparison,  there  are  several 
noteworthy  differences  in  which  the  reader  will  be  interested. 

194 


!l 


mi<<9 


Practical  Accounting  Problems. 

SOLUTION   (SECOND  FORM). 

Prime  cost  is  here  to  be  understood  to  mean:  (i)  Raw  Materials,  (2) 
Productive  Labor,  and  (3)   Manufacturing  Expenses. 

It  is  necessary  to  a  clear  understanding  of  this  problem  to  ascertain 
the  average  amount  of  raw  materials,  productive  labor  and  manufacturing 
expenses  used  up  in  the  goods  actually  sold  from  the  last  time  inventory 
was  taken;  for  this  purpose,  therefore,  the  figures  for  the  three  previous 
years  are  given  amongst  others.    Using  these  we  find  the  following: 

Raw  Materials  Account. 

1906.  1907-  1908. 

Inventory  at  beginning $39,223.16    $31,316.20    $33,416.20 

Purchases    186,320.16     104,360.22     157,316.20 

Total   $225,54332  $135,676.42  $190,732.40 

Less   Inventory  at  close 31,316.20      33,416.20      32,467.18 

Consumed    $194,227.12  $102,260.22  $158,265.22  $454,752.56 


Productive  Labor  Account. 


1906 — Amount  paid  therefor. 
1907 — Amount  paid  therefor. 
1908 — Amount  paid  therefor. 


$90,322.24 
61,212.06 
72,106.14 


$223,640.44 


Manufacturing  Expenses. 


1906 — Amount  paid  therefor. 
1907 — Amount  paid  therefor. 
1908— Amount  paid  therefor. 


$20,163.12 
16,208.17 
20,216.23 


$56,587.52 


Sales  Account. 

Deductions. 
Gross  Sales.  Allowances.  Returns.    Net  Sales. 

1906 $386,924-12      $1,1 16.24      $8,614.08  $377,193-80 

1907   217,306.01        3,605.75        4,106.18    209,59408 

1908   321,672.18  975-00        3,167.22    317,529-96 


$925,902.31      $5,696.99    $15,887.48 
21,584.47 


$904,317-84 


195 


$904,317.84 


Accountancy  Problems  and  Solutions. 

Average  Per  Cent,  of  Raw  Materials  used  in  goods 

actually  sold $454,75256 

$904,317.84    50.28% 
Average   Per  Cent,  of  Productive  Labor   in  goods 

actually  sold $223,640.44 

$904,317-84    24.73% 
Average   Per   Cent,  of  Manufactunng   Expenses  in 

goods  actually  sold $56,58752 

$904,317.84     6.25% 

Component  Elements  of  Costs  in  Prime  Costs. 

Per  Cent,  to  Per  Cent,  to 

Selling  Price.  Prime  Cost. 

Raw  Materials  50.28%  61.88% 

Productive  Labor   24.73%  30-43% 

Manufacturing  Expenses 6.25%  7.69% 

The  same  percentage  will  prevail  in  goods  in  process  and  made-up 

Arriving  now  at  the  period  where  the  fire  loss  occurs,  we  note  that  the 
last  inventory  taken  was  on  January  2,  1909. 

Analysis  of  Inventories,  January  2,  1909. 

Component  Component 

Elements  of  Elements  of 

Raw                               Goods  in  Made-up        Total. 

Materials.                           Process.  Goods. 

Raw  Materials $32,467.18    61.88%      $2,606.52    $12,223.45    $47,297.15 

Productive  Labor  ..  30.43%        1,281.78       6,010.98       7,292.76 

Manufacturing  Exp.  7.69%  323.92       1,51904       1,842.96 

$32,467.18  $4,212.22    $19,753-47    $56,432.87 


Statement  of  Goods  on  Hand  May  i,  1909,  When  Fire  Occurs. 

Raw  Productive    Manfg. 

Materials.  Labor.     Expenses. 

Inventory  Jan.  2/09,  as  above $47,297.15  $7,292.76     $1,842.16 

Purchases,  and  labor  expenses  to  May, 

1909   46,37522  21,618.06       5*167.20 


$93,672.37    $28,910.82      $7,010.16 


196 


Practical  Accounting  Problems. 

Deduct : 
Consumption  in  Net  Sales 

of   $93»237.I9 

Materials   50.28%  $46,87966 

Labor 24.73%  $23,057.56 

Mfg.   Expenses..    6.25% 


Inventory  at  May  1/09: 
Total,  $53,828.81.    Consists  of. 


$5,827.32 


$46,792.71      $5,853.26      $1,182.84 


Recapitulation. 

Productive  Labor  as  above,  24.73%,  on  Sales  or 
on  Prime  Cost 

Manufacturing  Expenses  as  above,  6.25%,  on  Sales 
or  on  Prime  Cost 

Raw  Materials  therefor 


30.43%      $5,853.26 

7.69%       i,i82A| 
61.88%      11,421.67 


Cost  of  Goods  in  Process ioo.%        $18^57.77 

Value  of  Raw  Materials,  per  Statement  of  Goods 

on  Hand  at  May  1/09 $46,792.71 

L«j  Consumed  in  Goods  in  Process 11,421.67      35,371.04 


Total  Value  of  Stock,  as  above. 


$53328.81 


Loss  adjusted  being  42^^%,  we  find  same  to  be  $22,877.24.  The  rest  of 
the  solution  is  the  same  as  the  original. 

This  form  of  solution  is,  as  will  be  seen,  briefer,  the  terminology 
simpler,  and  the  percentages,  used  in  the  recapitulation,  show  more  plainly 
how  the  amounts  for  raw  material  have  been  arrived  at. 


Problem  36. 

This  is  a  very  simple  problem  and  consequently  the  solution  does  not 
bring  out  extraordinary  features.  As  will  be  seen,  some  of  the  balances 
are  of  a  nature  that  at  a  glance  it  is  hard  to  tell  whether  they  are  debit 
or  credit  balances,  for  instance:  Discounts  and  Allowances  or  Com- 
missions. In  solving  a  problem  of  this  kind  it  is  therefore  advisable  to 
list  first  all  balances  about  which  there  can  be  no  question  and  then 
proceed  with  those  about  which  there  is  a  doubt.  A  good  guide  in  such 
cases  is  the  division  of  the  total  by  two ;  this  will  give  the  total  debit  and 
credit.  It  then  remains  only  to  re-arrange  doubtful  balances.  The  classi- 
fication is  the  same  as  in  other  similar  problems. 

197 


Accountancy  Problems  and  Solutions, 


Practical  Accountins:  Problems, 


ProUcm  37. 

The  problem  is  solved  in  accordance  with  the  law  of  the  State  of  New 
York,  which  is  fairly  representative  of  the  laws  of  all  the  States  of  the 
Union.  The  examiners  require  here  only  a  statement,  showing  the 
"corpus"  to  be  dealt  with  by  the  executors,  without  distinguishing  be- 
tween principal  and  income;  in  the  solution,  however,  the  items  are  so 
grouped  as  to  exhibit  separately  the  two  kinds  of  charges.  It  will  be 
noticed  that  the  value  of  the  real  property  is  omitted  from  the  statement,, 
in  accordance  with  the  law  which  does  not  consider  freehold  property  an 
asset  to  be  disposed  of  by  the  executor,  unless  ordered  to  do  so  by  the 
will  The  revenue  from  the  bonds  and  real  estate  is  divided  into  principal 
and  income  according  to  the  data  of  the  problem. 

The  problem,  not  being  in  itself  complete  should  be  studied  in  connec- 
tion with  problems  No.  2  and  No.  39;  only  then  can  the  student  get  an 
idea  of  the  schedules  required  for  executors'  acconnts. 

Problem  38. 

This  problem  compares  favorably  with  a  similar  problem  set  by  the 
Board  at  the  June,  1907,  examination.*  It  is  a  very  simple  yet  logical  test 
problem.  In  fact,  it  is  the  simplicity  that  makes  it  desirable  for  tests  of 
this  character. 

The  solution  to  the  problem  is  self-explanatory  with  perhaps  one  or 
two  exceptions.  The  figures,  as  disclosed  on  January  r,  1910,  are  debited 
to  the  respective  accounts,  and  the  total— unpaid  wages  excluded— is  cred- 
ited to  the  Main  Office  account  under  "  sundries."  The  unpaid  wages  are 
credited  in  the  Wages  account  and  the  Main  Office  account  is  debited  for 
the  accrued  figure. 

The  loss  sustained  on  the  replacement  of  machinery  is  charged  to  tlie 
Main  Office  account,  and  credited  to  **  Capital  Accounts."  As  the  factory 
books  deal  with  the  cost  of  materials  consumed,  etc.,  and  not  with  all 
operations,  this  is  the  only  logical  method  of  treatment  of  this  item. 

The   solution   is   not   at   all   difficult   to   the   experienced   accountancy 

student     The  facts  given  are  quite  clear,  and  the  candidate  needs  only 

follow  the  steps  from  the  opening  Trial  Balance,  which  he  is  expected  to 

have  constructed,  to  the  closing  one  to  arrive  at  the  correct  result.    There 

are  several  novel  points  to  this  problem;  in  the  treatment  of  the  factory 

as  a  separate  entity  in  so  far  as  its  operations  are  concerned,  and  also 

in  the  calculations  for  overtime,  which,  while  on  the  surface  appear  as 

rather  involved,  are  nevertheless  very  simple.    The  operatives'  overtime  is 

at  an  average  rate  of  45c.  per  hour  payable  on  a  basis  of  2V2  hours  overtime 

as  the  equivalent  of  3^  hours  regular  time.    This  rate  for  overtime  is 

according  to  recent  schedules  enforced  by  Trade  Unions  in  New  York 

City,  and  on  a  percentage  basis  is  equal  to  exactly  40%  of  the  regular  time. 

Tliere  are  several  other  accounting  features  involved  in  the  problem  which 

arc  Yery  distinctly  brought  out  in  the  solution,  and  which  the  reader  will 

do  well  to  study  carefully. 

♦  Accotmtaacy  Problems,  Volume  i,  page  .©7, 


Problem  39. 

This  problem  is  rather  lengthy— as  all  estate  propositions  are  bound  to 
be— and  therefore  it  calls  only  for  a  summary,  but  not  for  schedules. 

The  solution  is  so  arranged  and  worded  as  to  make  it  clear  and  com- 
prehensive. 

In  Statement  (b)  in  determining  each  legatee's  share,  the  balance  ol 
$164,595.78  was  taken  as  the  basis  for  distribution;  from  the  distribution 
share  was  deducted  each  legatee's  advances. 

In  Statement  (c)  it  will  be  noticed  that  the  specific  money  bequest  to 
the  "A"  Hospital  was  deducted.  This  is  based  on  various  court  decisions 
where  it  was  held  that :  "  No  compensation  can  be  allowed  an  executor 
for  receiving  or  delivering  a  specific  legacy."  Schenck  vs.  Dart,  22  N.  Y. 
420;  Matter  of  Robinson,  ^y  Misc.  336. 

That  a  money  legacy  can  be  made  specific  is  indicated  by  the  decisions 
in  the  matter  of  Getman,  128  App.  Div.  767  and  Matter  of  Delancy,  133 
App.  Div.  409.  In  the  above  cases  it  was  held  that  when  the  money  is 
described  by  the  testator  so  as  to  enable  the  legatee  to  point  it  out  to  the 
executor  as  in  a  particular  place,  chest,  bag  or  purse,  or  in  some  person's 
hands,  so  that  it  can  be  delivered  in  specie,  it  is  a  specific  legacy. 

In  view  of  the  fact  that  the  testator  left  $69,250.00  in  cash  with  banks 
or  on  hand  and  the  problem  reads  that  the  bequest  is  specific,  we  take  it 
for  granted  that  the  money  must  have  been  clearly  indicated  in  the  will 
and  therefore  do  not  allow  commission  on  it. 

Problem  40. 

This  problem  illustrates  the  modern  idea  of  consolidation,  as  weU  as 
the  purchasing  of  assets  by  means  of  a  stock  and  bond  issue. 

The  solution  is  very  simple  and  self-explanatory.  There  are,  however, 
two  things  worthy  the  careful  attention  of  the  reader,  namely :  the  method 
of  treating  the  doubtful  accounts  receivable  and  the  treatment  of  treasury 
bonds.  In  the  case  of  the  former  a  separate  entry  is  made  for  the  doubtful 
accounts  instead  of  amalgamating  them  with  the  accounts  considered  good. 
In  the  case  of  the  latter  the  entire  authorized  issue  is  placed  on  the  books 
and  so  is  also  the  corresponding  liability  on  the  mortgage.  This  is  based 
on  the  theory  that  the  borrowing  corporation  has  issued  a  mortgage  in 
favor  of  a  third  party  as  trustee  for  all  bondholders  and  this  trustee  is  the 
legal  lender  to  whom  the  corporation  is  liable ;  hence  the  debit  to  Treasury 
Bonds  and  the  credit  to  the  Mortgage  Payable. 


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Following  are  selected  questions  with  answers  on  each  of  the 
following  subjects :  Theory  of  Accounts,  Auditing  and  Commer- 
cial Law.  The  questions  are  selected  from  the  New  York,  Rhode 
Island,  Illinois,  Michigan,  Maryland,  Ohio  and  Florida. 

Theory  of  Accounts. 

Questions. 

( 1 )  A  has  exhausted  his  credit  with  B.  He  needs  further  accommoda- 
tion to  the  extent  of  $2,500,  to  obtain  which  he  gives  B  a  three  months"  ^ 
draft  on  C  for  $2,500.  This  is  $1,000  more  than  C  owes  A.  To  adjust 
this  difference  C  draws  at  four  months  on  A  for  $1,000.  Assuming  that 
the  drafts  have  been  accepted  by  the  respective  parties,  state  what  entries 
his  books  would  show. 

(2)  Mention  the  methods  of  bookkeeping  in  general  use.      What  books  , 
are  ordinarily  kept  in  each  case  ?    How  is  the  profit  or  loss  ascertained  by 
the  different  systems? 

(3)  Devise  a  system  of  accounts  for  an  executor.    What  accounts  must  . 
he  necessarily  keep? 

(4)  A  merchant  draws  a  draft  of  $1,000  at  four  months,  on  a  customer 
who  owes  him  an  open  account  and  the  draft  is-  accepted  on  February  2,  . 
1909.    On  March  13,  ipog,  he  discounts  the  draft  at  the  bank  at  6%  per 
annum.    What  entries  should  be  made  on  the  merchant's  books  to  record 
the  transactions  properly? 

is)  How  would  you  deal  with  items  accrued  and  due  (such  as  rent,  ^ 
commission  and  salaries)  when  closing  the  accounts  of  a  business  at  the 
end  of  a  fiscal  period? 

(6)  What  is  a  contingent  liability?     Give  examples.     In  what  forms  • 
should  liabilities  appear  in  a  financial  statement? 

(7)  Give  the  ruling  of  a  stock  or  shares  ledger  for  a  corporation.    Show 
how  this  book  is  kept  and  indicate  its  relation  to  the  general  books  of  * 
account. 

(8)  Describe  two  methods  of  treating  depreciation  of  machinery  on  both  - 
the  books  and  the  balance  sheet. 

(9)  State  what  constitutes  contingent  assets  and  contingent  liabilities. 
Give  three  illustrations  of  each.     State  whether  or  not,  in  your  opinion,  * 
they  should  be  represented  in  the  books  of  account  and  whether  or  not 
they  should  appear  in  the  balance  sheet  of  a  going  concern,  if  so,  in 
what  manner? 

203 


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Accoimtancy  Problems  and  Solufiofis. 

(lo)  What,  in  your  opinion,  would  be  the  proper  accounting  record  for 
>  business  corporation  to  make  of  an  appropriation  from  its  snrplus  profits 
lor  the  amount  of  a  permanent  investment  in  property? 

(ii)  Define  the  following  terms  as  applied  to  accounting:  (a)  nominal, 
(b)  accrued,  (c)  deferred,  (d)  net  profit,  (e)  capital. 

(12)  Explain  fully  in  what  way,  if  at  all,  the  following  should  enter  into 
trading  and  profit  and  loss  statements,  with  reasons  for  inclusion  or 
exclusion:  (a)  partners'  salaries,  (b)  profit  on  sale  of  real  estate,  (c) 
partners'  drawings,  (d)  overvaluation  of  opening  inventory,  (c)  estimated 
losses  in  realization  of  trading  assets. 

( 13)  Explain  method  by  which  the  net  result  of  a  double  entry  profit  and 
loss  accoimt  may  be  proved  by  use  of  resources  and  liabilities. 

(14)  Submit  pro  forma  entries  covering  an  incidental  shipment  of  goods 
to  a  factor,  prepayment  of  freight,  receipt  of  advances,  receipt  of  account 
»les  with  cash  to  cover  balance  due,  and  closing  of  account. 

(15)  Define  (a)  scrip,  (b)  stock  right,  (c)  amortization,  (d)  deprecia- 
tion, (e)  consolidated  balance  sheet. 

(16)  A  mortgage  provides  for  a  sinking  fund  to  be  accumulated  in  the 
hands  of  a  trustee  from  profits  prior  to  dividend  payments.  Prepare 
skeleton  balance  sheet  to  disclose  the  state  of  the  fund,  dividends  declared 
and  payable,  appropriation  of  profits  for  purpose  of  the  fund  and  an  unap- 
propriated surplus.  What  eflFect  would  losses  in  excess  of  such  unapprn>- 
priated  surplus  have  on  the  sinking  fund? 

(17)  State  and  differentiate,  for  balance  sheet  purposes,  the  rules  of 
valuation  that  apply  in  the  following:  (a)  long  time  bonds  bought  at  a 
premium  for  investment,  the  market  value  of  which  has  advanced,  (b) 
dividend-paying  stocks  bought  for  investment,  the  market  value  of  which 
lias  declined,  (c)  long  time  bonds  bought  at  a  discount  for  speculation,  the 
market  value  of  which  has  advanced,  (d)  real  estate  (land)  that  has 
appreciated. 

(18)  State  fully  reasons  for  or  against  the  use  of  cash  receipts  and  pay- 
ments on  account  of  trading,  as  a  basis  for  imposition  of  a  tax  on  corporate 

Incomes. 

(19)  Define  (a)  revenue  balance  sheet,  (b)  work  in  process,  (c)  hf- 
product,  fd)  deficiency  account  in  insolvency,  (e)  final  accounting. 

(20)  Show  the  method  and  the  advantages  in  cost  accounting  of  the 
process  of  articulating  the  general  ledger,  factory  ledger  and  stores  ledger 
%  summary  accotmts. 


Questions  in  Theory  of  Accounts. 

(21)  State  the  powers  of  the  Public  Service  Commissions  in  respect  to 
the  accounts  of  common  carriers.  What  supervision  is  exercised  over 
additional  issues  of  notes,  bonds  and  stocks  ? 

(22)  Outline  accounting  procedure  necessary  to  prepare  schedules  in 
bankruptcy  under  the  United  States  Bankruptcy  Act.  State  schedules  ill 
their  order  and  give  substantially  what  each  should  contain. 


Theory  of  Accounts. 

Answers. 

JOURNAL  ENTRIES  IN  A'S  BOOKS. 

B $2,500 .  00 

To  C $a,5oo ,  00 

For  a  three  months'  draft  drawn  on  C  in  favor 
of  B. 

C. $1,000.00 

To  Notes  Payable $1,000.00 

For  a  four  months  draft  drawn  by  C  on  me 
which  I  have  accepted. 


A'S  LEDGER. 


B 


Notes  Payable 


To  C's  draft  $2,500 


By  Balance  $0,000 


To  my 

acceptance 
$1,000 


By  draft  in 
favor  of  B 
$2,500 


By  four  months 
acceptance  $1,000 


NOTE: 

No  entry  is  shown  for  the  additional  credit  given  by  B  to  A  for  the 
purpose  of  which  the  accommodation  paper  was  made  as  we  do  not  know 
what  account  to  debit.  We  also  follow  the  assumption  that  A  submitted 
his  draft  to  B,  who  presented  it  himself  to  C  for  a  cceptance. 

(2)  There  are  two  fundamental  methods  for  recording  exchanges,  or 
business  transactions ;  namely,  single  and  double  entry.  Where  the  books 
are  kept  upon  a  partial  or  incomplete  system  of  bookkeeping  they  are  said 
to  -be  kept  by  single  entry.  Double  entry  bookkeeping  is  that  method 
of  bookkeeping  by  which  the  accounts  are  kept  with  all  kinds  of  values 
received  or  disbursed.  It  is  assumed  that  each  individual  exchange  has 
a  two-fold  effect.  When  this  two-fold  effect  is  expressed  on  the  books 
we  speak  of  it  as  bookkeeping  by  double  entry. 


Accountancy  Problems  and  Solutions. 

With  regard  to  the  books  employed  there  is  hardly  any  difference, 
regardless  of  the  system  that  is  employed.  A  firm  may  have  an  elaborate 
■et  of  books  and  yet  keep  the  accounts  on  the  single  entry  system.  On 
the  other  hand  it  may  have  but  a  journal  and  ledger  yet,  as  all  the  facts 
and  transactions,  expressing  the  two-fold  effect  of  each  exchange  would  be 
recorded,  it  would  be  on  the  double  entry  principle.  The  books,  of  course, 
would  vary  and  would  depend  on  the  Une  of  business  and  the  details  that 
liave  to  be  recorded. 

Under  the  single  entry  system  the  profit  made  or  loss  sustained 
during  a  given  period  would  be  determined  by  a  comparison  of  the  assets 
and  liabilities  of  one  period  with  the  assets  and  Habilities  of  another 
period.  The  profit  made  must  represent  an  increase  of  assets,  a  decrease 
of  liabilities  or  there  may  be  an  increase  of  assets  and  at  the  same  time  a 
decrease  of  liabiHties,  always  provided  that  the  original  proprietorship  is 
not  changed.  We  would  have  to  take  cognizance  of  any  change  in  the 
proprietorship. 

Under  the  double  entry  system  the  profit  or  loss  is  determined  by 
means  of  the  nominal  or  economic  accounts.  These  accounts  are  kept  for 
the  purpose  of  showing  the  economic  condition  of  the  firm,  to  show 
whether  the  business  is  progressing  or  retrogressing.  All  the  debit  bal- 
ances of  such  accounts  would  indicate  the  outlay  or  cost,  while  the 
credit  balances  would  indicate  the  income  or  return.  The  difference 
would  show  the  net  profit  made  or  net  loss  sustained. 

(3)  An  executor  does  not  need  an  elaborate  system  of  accounting. 
He  must,  of  course,  keep  a  journal  and  a  cash  book,  wherein  to  enter  in 
chronological  order  the  transactions  and  affairs  of  the  estate,  and  a  ledger 
wherein  to  record  in  classified  form  the  transactions  recorded  in  the 
journal  and  cash  book. 

The  executor  may  find  it  advantageous  to  columnarize  the  journal 
in  order  to  facilitate  not  only  the  posting,  but  also  the  preparation  of  the 
final  accounting.  The  cash  book,  however,  should  by  all  means  be 
colunmized.  The  columnization  should  be  in  such  a  form  as  to  facilitate 
a  speedy  and  thorough  accounting.  The  form  of  a  cash  book  on  page 
a  07  would  be  suggestive. 

He  must,  of  course,  keep  accounts  for  the  assets  of  the  estate,  as  left 
by  the  deceased.  He  must  have  an  account  for  the  personal  estate,  for 
the  transfer  tax,  for  the  legacies  and  administration,  as  well  as  funeral 
expenses,  etc.  He  must  clearly  distinguish  between  corpus  and  income 
with  regard  to  receipts  and  payments. 


Answers  in  Theory  of  Accounts, 


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Accountancy  Problems  and  Solutions. 

(4)  The  question  does  not  give  the  date  when  the  draft  was  drawn.  It 
is,  of  course,  not  essential  that  it  should  be  given,  although  a  meraoran- 
dtun  entry  should  be  made  in  the  journal  of  the  merchants'  books  to 
■how  that  a  draft  has  been  drawn. 

On  receipt  of  the  acceptance  the  entry  would  be  made  in  the  journal  as 
follows: 

Notes  Receivable $1.000 .  00 

To  Customer fi.ooo.oo 

For  a  four  months*  draft,  accepted  by  the 
customer  in  settlement  of  his  account. 
When  the  note  is  discounted  on  March  the  13th  at  the  bank  the 
proper  entry  in  the  cash  book  would  be: 

DR.  SIDE. 


Date 

Particulars 

Net  Cash 

Discount 

General 
Ledger 

1909 
March  13 

Notes     Receivable     Dis- 
counted (Customer's 
Note) 

$986.50 

ti3-50 

$1,000.00 

The  notes  receivable  discount  account  is  debited  instead  of  the  notes 
receivable  in  order  to  express  the  existing  contingency  on  the  books. 

(5)  When  in  closing  the  accounts  of  a  business  at  the  end  of  a  fiscal 
period  there  are  accrued  items,  such  as  rent,  commission,  or  salaries,  ad- 
justment entries  must  be  made  for  them.  In  order  to  express  the  exact 
condition  for  the  period  the  accrued  items  must  be  taken  into  considera- 
tion.  They  would  be  charged  to  the  profit  and  loss  account  and  credited  to 
a  reserve  properly  ear-marked  thus:  "reserve  for  accrued  rent"  or  "re- 
serve for  commission,"  etc.  On  the  balance  sheet  the  reserves  would 
appear  as  liabiHties  or  they  would  be  deducted  from  the  assets. 

(6)  A  contingent  liability  is  a  term  given  to  the  liabilities  of  a  firm  or 
business  when  such  liabilities  are  doubtful.  A  discounted  note  bearing 
the  endorsement  of  the  firm  as  long  as  the  note  has  not  been  paid  by  the 
maker  is  a  contingent  liability  on  the  books  of  the  firm  endorsing  such 
instrument.  Accommodation  papers  are  also  examples  of  contingent  liabil- 
ities ;  the  firm  may  at  some  future  time  be  called  upon  to  make  them  good. 
There  are  two  ways  of  treating  such  liabilities  in  a  financial  statement. 
One  method  is  to  enter  it  on  the  books  and  show  it  as  a  liability  against 
which  there  will  always  be  some  asset.  In  the  case  of  the  notes  receivable 
mentioned  before  the  liability  of  notes  receivable  discounted  would  always 
have  the  asset  notes  receivable  behind  it.  Another  method  of  dealing  with 
contingent  liabilities  in  a  financial  statement  is  to  merely  show  it  as  a 
footnote.  The  former  method  is  preferable  because  it  expresses  the  exact 
condition  on  the  books  of  the  firm. 

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Accountancy  Problems  and  Solutions. 


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210 


^M,ywff^  in  Theory  of  Accounts. 

There  is  practically  no  relation  to  speak  of  that  exists  between  the 
stock  ledger  and  the  general  books  of  account. 

If  the  capital  stock  account  in  the  financial  ledger  shows  only  the 
amount  of  stock  issued  and  outstanding,  not  including  under  it  unissued 
stock,  then  the  stock  ledger  would  contain  the  individual  accounts  of  the 
holders,  thus  reconciling  it.  In  this  instance  the  capital  stock  account  in 
the  financial  ledger  would  be  a  controlling  account  for  the  individual 
accotmts  in  the  stock  ledger. 

(8)  The  two  methods  referred  to  in  the  question  are  the  English  and 
the  American.  The  English  practice  is  to  provide  for  depreciation  by 
a  charge  against  revenue  and  a  credit  to  the  asset  itself.  To  illustrate: 
Supposing  the  original  cost  of  the  plant  and  machinery  were  $S,ooo  and 
we  have  decided  to  provide  for  depreciation  by  charging  against  revenue 
seven  and  one-half  per  cent,  annually  on  the  declining  balance. 
By  the  English  practice  the  account  would  appear  as  follows': 

Plant  and  Machinery 


Original  cost $5,000.00 


$5,000.00 


Depreciation $  375.00 

Balance 4,625.00 


$5,000.00 


Balance $4,625.00 

On  the  balance  sheet  the  plant  and  machinery  account  would  appear 
at  a  valuation  of  $4,625.00 

By  the  American  method  the  depreciation  is  credited  to  an  account 
headed  "Reserve  for  Depreciation  on  Plant  and  Machinery."  The 
asset  account  is  carried  at  cost,  while  the  reserve  account  shows  the 
depreciation  provisions. 

On  the  balance  sheet  it  is  shown  thus: 

Plant  and  Machinery  (cost) $5,000.00 

Less  reserve  for  depreciation  (7  J4%) 375-00       $4,625.00 


(9)  By  contingent  assets  we  mean  assets  which  are  doubtful  of  realiza- 
tion. By  contingent  liabilities  we  mean  liabilities,  the  liquidation  of  which  is 
doubtful.  Suspense  accounts,  money  due  the  firm  on  a  contract  not  fulfilled 
as  yet,  collateral  in  the  possession  of  the  firm  to  secure  the  payment  of  an 
obligation,  are  illustrations  of  contingent  assets'.  Notes  receivable  dis- 
counted by  us,  accommodation  instruments,  and  liabilities  not  recognized 
by  the  firm  but  which  are  pending  in  a  law  suit  are  illustrations  of 
contingent  liabilities.  While  it  is  not  absolutely  essential  that  such 
contingent  assets  and  liabilities  respectively  should  be  represented  in  the 
books,  although  quite  advisable,  they  should  nevertheless  appear  in  the 
balance  sheet.  The  accountant  who  prepares  the  balance  sheet  should, 
in  a  footnote  call  attention  to  the  contingent  assets  or  liabilities 
respectively. 

211 


Accountancy  Problewis  and  Solutions. 

(id)  The  proper  accotinting  record  in  such  case  would  be  to  debit  the 
surplus  account  and  to  credit  an  account  entitled  Reserve  for  Investment 
By  this  method  the  surplus  account  is'  diminished  by  the  amount  of  the 
sum  appropriated  for  investment  and,  therefore,  shows  so  much  the  less 
•▼•ilable  for  dividends.  When  the  asset  is  acquired  the  next  record 
ilioiild  be  to  debit  the  asset  so  acquired  and  to  credit  cash. 

(li)  (a)  Nominal  accounts  are  those  accounts  which  record  the  transac- 
tions relating  to  revenue  and  expenses  and  which  are  closed  at  the  end  of 
a  iscal  period  by  transferring  the  balances  to  the  trading,  income  or  profit 
and  loss  accounts. 

(b)  Accrued  accounts  represent  assets  or  liabilities  in  course  of  ac- 
cumulation but  not  due  at  the  time  of  closing  the  accounts. 

(c)  Deferred  accounts  represent  assets  or  liabilities  which  are  due  at 
the  time  of  closing  the  accounts  but  which  will  not  be  settled  until  some 
subsequent  date. 

(d)  Net  profit  is  the  balance  to  the  credit  of  an  account  after  all  proper 
charges  and  credits  have  been  posted ;  thus  net  trading  profit  will  be  the 
credit  balance  in  the  trading  account  but  net  profits  are  usually  under- 
stood to  be  the  profits  before  distribution. 

(e)  Capital  is  the  sum  of  the  assets  invested  in  an  enterprise. 

(12)  (a)  Partners'  salaries  should  be  charged  to  profit  and  loss,  as  the 
remit  of  trading  operations  should  be  arrived  at  independently,  and  part- 
ners' salaries  are  a  part  of  the  expense  of  administration. 

(b)  Profits  on  sales  of  real  estate  do  not  enter  into  the  trading  account 
or  profit  and  loss  aicount.  They  are  an  increase  in  capital  investment  and 
go  direct  to  the  surplus  account. 

(c)  Partners'  drawings  do  not  affect  the  trading  account  or  profit  and 
loss  account.  They  go  direct  to  partners'  accounts,  because  they  are  drawn 
against  anticipated  profits. 

(d)  Overvaluation  of  inventory  should  1»€  carried  to  the  capital  account, 
otherwise  to  the  surplus  account,  and  not  allowed  to  affect  the  current 
profit  and  loss  account 

(e)  Estimated  losses  in  realization  of  trading  assets  should  be  charged 
to  profit  and  loss  direct  in  order  not  to  disturb  the  results  of  current 
transactions,  as  these  estimates  may  or  may  not  materialize. 

(13)  The  net  results  of  a  double  entry  profit  and  loss  account  may  be 
proved  by  comparing  the  difference  between  the  assets  and  liabilities  at 
the  beginning  and  at  the  end  of  the  fiscal  period.  The  difference  will 
equal  the  balance  in  profit  and  loss  account. 


(14) 

Factor  A.  B  Co.    Dr. 

To  Consignment   B. 
To  charge  A.  &  Co. 


(I) 


$3,000 


Cr 

shipment- 


$3,000 


y^ 


212 


Anstvers  in  Theory  of  Accounts. 

(2) 

Factor  A   &  Co.    Dr $100 

To  Consignment  B.    Cr $i®o 

Freight  on  shipment. 

(3) 

Cash.  Dr •  •  •  $2,500 

To  Factor  A.  &  Co.    Cr $2,500 

Payment  on  account  received. 

(4) 

Cash.  Dr $1,000 

To  Factor  A.  &  Co.    Cr $1,000 

Balance  of  account  sales. 

(5) 

Factor  A.  &  Co.    Dr $400 

To  Consignment  B.     Cr $400 

To  charge  A.  &  Co.  with  amount  to   make    up    difference    between    f*r<f 
forma  price  and  proceeds. 

(6) 

Consignment   B.     Dr $3,400 

To  Sales.     Cr $3,4O0 

To  close  former  account  and  credit  sales  with  proceeds  of  consignment. 

(15)   (a)   Scrip  is  an  evidence  of  issue  of  a  fractional  share  of  stock. 

(b)  Stock  right  is  the  option  of  a  holder  of  stock  to  subscribe  to  a  new 
issue. 

(c)  Amortization  is  the  reduction  during  the  term  of  a  security  pur- 
chased at  a  premium  to  its  redemption  value. 

(d)  Depreciation  is  the  periodical  writing  off  of  the  value  of  an  asset 
by  an  amount  representing  its  wear  and  tear  and  obsolescence. 

(e)  A  consolidated  balance  sheet  is  a  balance  sheet  incorporating  the 
assets  and  liabilities  of  several  companies  in  one  statement. 

(16)  Balance  Sheet,  December  31,  1910. 

Current  Assets   

Fixed  Assets  

Sinking    Fund   Trustee. .' 

Investments 

Cash   on   Deposit 

Current  Liabilities 

Capital   

Sinking  Fund  Account 

Dividends    Payable    

Surplus   (Unappropriated)    


■IL 


■^     -iSF" 


i 


213 


Accotmiancy  Problems  and  Solutions. 

Stich  loss  would  have  no  effect  upon  sinking  fund  provided  it  did  not 
exceed  both  surplus  unappropriated  and  dividends  deferred.  If  such  loss 
did  exceed  these  two  items,  then  the  total  amount  called  for  could  not  be 
placed  in  sinking  fund. 

(17)  (a)  Long-time  bonds  for  investment  should  appear  in  the  balance 
•heet  as  par,  the  premium  reduced  by  periodical  amortization. 

(b)  Dividend-paying  stocks  should  be  shown  at  purchase  price.    The 

market  fluctuations  of,  investments  should  not  affect  the  balance  sheet  LArf^ 

valuation.  '■«*"  "»-**•*'  e '*^-^<lA.  *»-#'  ■•m^J^ *^  U|l*«il  -  >x*..^  ■  v       )  *\>  ..'f-^''*^*«.. 

(c)  Bonds  bought  for  speculation  may  be  shown  at  market  price,  be- 
cause this  will  affect  the  amount  available  for  distribution  as  dividends  or 
profits,  and  as  this  was  the  purpose  of  the  mirchase  it  is  legitimate  to 

revalue  at  realizable  figures.  u*.i ^^i,    o^lM^I-^kiX* 1I  ■•|ia^".         i^ tA,\>^i/_ 

(d)  Land  that  has  appreciated  should  not  in  general  be  revalued  ex- 
cept when  the  balance  sheet  is  prepared  with  a  view  of  selling  the  enter- 
prise or  for  some  similar  purpose.  Going  concerns  should  not  be  revalued 
except  at  intervals. 

(18)  A  tax  on  corporate  ipcome  should  not  be  based  on  cash  receipts 
and  disbursements,  as  the  difference  between  them  is  not  the  measure  of  the 
income.  Without  taking  into  account  the  unpaid  liabilities  and  the  un- 
realized assets,  the  income  available  for  dividends  cannot  be  determined, 
as  it  may  happen  that  the  cash  disbursements  exceed  the  income  and 
vice  versa, 

(19)  (a)  Revenue  balance  sheet  contains,  in  addition  to  regular  items 
noted  in  the  balance  sheet,  a  condensed  revenue  and  expenditure  accotmt, 
showing  how  the  profit  or  loss  for  the  period  was  ascertained. 

(b)  Work  in  process  is  a  term  given  to  partly  finished  goods  that  are 
being  manufactured. 

(c)  By-product  is  a  term  given  to  a  manufactured  article  that  is  made 
from  the  waste  of  materials  used  in  manufacturing  the  goods  for  which 
Hie  business  is  operated. 

(d)  Deficiency  account  in  insolvency  is  the  name  used  to  describe  that 
account  which  summarizes  those  items  which  caused  the  loss  in  the  busi- 
ness and  show  how  such  loss  was  incurred. 

(e)  Final  accounting  is  a  term  used  to  describe  the  report  rendered  by 
executors,  administrators  or  trustees  upon  the  final  winding  up  and  dis- 
tributing of  the  estate  in  their  charge  or  for  the  period  for  which  they 
have  been  appointed. 

(20)  By  summary  accounts  in  the  general  ledger  the  total  of  all  aggre- 
gate transactions  as  recorded  in  the  factory  and  stores  ledgers  are  car- 
ried to  these  controlling  accounts  in  the  general  ledger.  The  advantages 
are  that  the  general  ledger  shows  in  summary  form  the  factory  and  stores 
accounts,  thus  relieving  the  general  bookkeeper  from  detail  in  connection 
therewith.    The  factory  and  stores  accounts  as  recorded  in  their  respec- 


\ 


Answers  in  Theory  of  Accounts. 

tive  general  records  show  the  details  which  allow  control  of  all  operations 
and  supplies  having  to  do  with  cost  accounting.  These  records  are  gen- 
erally kept  at  the  factory  and  stores  respectively,  the  clerks  in  charge  giv- 
ing such  summary  entries  as  will  enable  the  general  bookkeeper  to  incor- 
porate the  transactions  in  total  upon  his  general  ledger. 

(21)  The  Public  Service  Commissions  exercise  general  supervision  over 
the  accounts  of  common  carriers  in  order  to  secure  uniformity  in  the  re- 
ports rendered  and  to  make  possible  intelligent  comparison.  They  may 
prescribe  the  accounts  to  be  kept  and  the  items  which  shall  enter  these 
accounts,  but  not  how  much  of  the  income  shall  be  spent  for  a  particular 
purpose.  They  may  prescribe  that  depreciation  accounts  shall  be  kept,  but 
the  rate  of  depreciation  must  necessarily  vary  with  different  enterprises. 
Additional  issues  of  securities  must  be  authorized  by  the  commissions,  the 
basis  for  the  new  issue  being  in  general  the  additional  value  put  into  the 
property  or  increased  earning  power. 

(22)  The  bankruptcy  laws  state  that  it  is  the  duty  of  the  bankrupt  to 
file  schedules  as  follows: 

First,  of  all  his  property  and  where  located. 

Second,  of  all  creditors  as  to  their  names,  amounts  due,  consideration 
given  and  if  they  hold  any  security  for  their  claims. 

Third,  schedule  of  all  property  which  the  bankrupt  claims  to  be  exempt 
under  his  State  laws. 

The  accounting  procedure  is  as  follows: 

First,  obtain  all  books  and  records. 

Second,  build  up  the  schedules,  as  heretofore  mentioned,  from  aU 
sources  possible. 

Third,  I  think  I  should  prepare  a  list  of  prior  debts. 

Fourth,  although  the  laws  do  not  state  that  a  schedule  be  drawn  show- 
mg  cause  of  bankruptcy,  still,  if  I  am  employed  by  the  bankrupt,  I  would 
draw  up  such  statement,  as  the  laws  state  that  the  bankrupt  must  answer 
all  questions  relating  to  the  cause  of  his  insolvency. 


•J 


i 


Accimmifmcy  Problems  and  Solutions, 

Auditing. 

Qucstioiii* 

*(!■)  State  the  objects  tO'  be  attMned  by  an  audit 

•(a)  State  the  steps  necessary  to  verify  the  cash  receipts  and  payments 
for  a  period,  including  the  resultant  cash  balance. 

'(3)  Draft  instructions  for  client  to  follow  in  monthly  reconciliation  of 
I,  as  basis  for  your  audit 


i 


'(4)  In  the  case  of  an  unexplained  absence  of  a  bookkeeper  who  has  had 
the  entire  charge  of  a  set  of  partnership  books,  state  the  steps  that  should 
be  taken  to  detennine  whether  or  not  irregularities  had  been  committed. 

ts)  The  machinery  used  by  a  firm  has  been  purchased  on  the  instalment 
plin,  with  monthly  payments,  and  under  the  stipulation  that  the  title  shall 
pass  only  when  the  last  payment  has  been  made;  at  the  close  of  the  fiscal 
year  there  are  yet  several  payments  to  be  made.  The  firm  also  pays  a 
mf9kf  on  the  output  of  some  of  the  machines  secured  by  this  plan.  How 
sboald  the  auditor  in  his  annual  statements  deal  with  the  machinery,  the 
imtalments  paid  and  the  royalty? 

(6)  State  the  method  and  the  objects  of  an  analysis  of  bills  payable 

account. 

'(7)  State,  in  the  order  of  their  importance,  ^ve  rules  for  the  guidance 
of  a  junior  in  starting  on  his  first  audit. 

■'(8)  Outline  working  papers  and  office  records  necessary  to  handle  dc- 
tatlci  semi-annual  audit  of  a  wholesale  mercantile  house. 

*(9)  State  precautions  that  you  would  take,  in  verification  requiring  sev- 
eral days'  work,  of  the  securities  of  an  insurance  company,  including  both 
stocks  and  bonds  in  negotiable  and  non-negotiable  form. 

*(lo)  A  corporation  has  branches  in  twenty  cities,  each  selling  at  retail 
Its  standard  product  and  paying  local  bills  from  receipts.  State  mat- 
ters on  which  the  traveling  auditor  of  the  corporation  should  report  and 
suggest  suitable  forms  therefor. 

'  (11)  A  client  who  has  a  beneficial  interest  in  the  corpus  of  an  estate 
employs  an  accountant  to  conduct  a  complete  audit  State  the  points  on 
which  the  accountant  should  particularly  report 

*  (12)  In- case  it  is  expedient  to  have  a  local  accountant  audit  the  accounts 
of  a  branch  office  of  a  wholesale  trading  firm  for  which  you  conduct  the 

aili 


Questions  in  Auditing. 

general  audit,  state  matters  on  which  you  would  require  a  report  The 
branch  sells  goods,  collects  from  customers,  pays  all  local  expenses  and 
remits  cash  in  round  amounts  to  home  office. 

*(I3)  In  what  way,  if  at  all,  would  you  report  the  fact  that  a  trusted  office 
manager  had  overdrawn  his  salary  amount  at  various  times,  in  no  case 
more  than  $300,  all  of  which  had  been  returned  before  the  time  of  the 
annual  audit?    State  reasons  fully. 

1(14)  A  balance  sheet  audit  discloses  satisfactory  conditions  with  the 
exception  of  insufficient  allowance  for  losses  in  collection  of  accounts 
receivable.  In  case  the  client  should  not  consent  to  adjustment,  draft 
form  of  certificate  that  would  be  proper  under   the  circumstances. 

*(i5)  State  the  arrangement  of  a  report  in  which  it  is  desired  to  present 
balance  sheet  with  supporting  schedules  of  accounts  receivable,  accoimts 
payable,  bills  receivable  and  bills  payable,  and  profit  and  loss  account,  to- 
gether with  comment  on  extraordinary  features  of  the  business. 

'"(16)  An  insurance  company  buys  $50,000  7%  to  year  bonds  at  116  for 
investment  The  bonds  will  mature  at  the  expiration  of  5  years.  How 
should  this  purchase  be  entered  on  the  balance  sheet?  What  should  be 
done  with  the  premium? 

*  (17)  If  in  the  course  of  auditing  it  appeared  that  the  capital  expenditures 
had  been  charged  against  profit  and  loss  account,  or  items  of  expense 
charged  against  improvement  account,  what  should  the  auditor  do  in 
respect  to  such  charges? 

''(18)  What  entry  should  be  made  in  the  books  of  a  company  of  goods 
sent  out  on  consignment?  When  goods  have  been  sold  and  the  consignee 
sends  in  his  account  sales,  what  entry  should  be  made? 

'(19)  In  auditing  the  books  of  a  corporation  the  president's  salary 
account  was  found  to  have  been  credited  with  a  bonus  of  $5,000  for  "  extra 
services."    Under  what  conditions  would  you  pass  this  entry? 

^(20)  Would  the  auditor  of  a  firm  or  corporation  be  warranted  in  revis- 
ing the  form  or  wording  of  a  balance  sheet  before  attaching  his  certificate? 
Why? 

'(21)  Is  it  necessary  to  verify  the  stock  ledger  of  a  corporation?    Why? 

'(22)  Are  there  in  your  opinion  any  reasons  in  favor  of  continuous 
auditing?    If  so  give  such  reasons. 

''(23)  Outline  the  duties  and  the  responsililities  of  a  public  accountant 
as  an  independent  auditor. 

^(24)  State  the  process  by  which  the  balance  of  the  cash  account  may 
be  reconciled  with  the  bank  pass  book.  What,  if  any,  confirmation  of  the 
bank  pass  book  balance  should  be  obtained  ? 

217 


iiiiinilir'"* 


\   \ 


Accountaitcy  Problems  and  Solutions. 

'r„.i  Whnf  meatis  should  an  auditor  use  to  verify  accounts  representing 
(25)  What  means  snouiu  <u.  -  ,„pivah1e   and  to  ascertain 

bonds  and  stocks  owned  and  biUs  »n<l  ™t«  'VIV  worth  ? 
whether  or  not  the  book  values  are  w.thm  the  real  worth? 

U26)  What  means  should  an  auditor  use  to  verify  »«»»"!'  °*  ^"^^ 
debtors  i«d  to  classify  them  as  good,  doubtful  or  uncollectible?  What 
^^hT^o  respecti'ng  the  doubtful  and  uncollectible  accounts  before 

giiring  a  certifiicatc? 

•  (27)  Is  it  tiecessary  that  an  auditor  should  aspect  the  "?""*!'  °^^ 
stockholders'  and   the  directors'   meetmgs?      ^^Ich  relords  > 
What  should  he  do  in  case  he  is  refused  access  to  such  records. 

t*)  IB  auditing  the  hooks  ^^^^^^^^^tll^^^^^ 
takes  notes  from  its  customers,  what,  if  ^\~^^^^  a 

to  whether  or  not  any  of  these  notes  have  been  discounted,  especially 

a  certified  balance  sheet  is  desired? 
\m)  Is  an  ordinary  bank  check  drawn  by  the  the  concern  whose  books 

yoLte  auditieg.  to  the  order  of  the  Receiver  of  T-es  and  pro^^^^ 

dorsed  by  him,  a  sufficient  voucher  for  the  payment  of  the  taxes  ot  tnis 

concern?    Give  reasons. 
-(m)  Two    concerns    in    similar   lines   contemplate   consolidating   their 

bus^ss;  you  are  requested  to  examine  the  books  ^^f^"^^ 

matters  germane  to  the  contemplated  merger.     What  data  would  you 

probably  present  in  your  report? 
■''(31)  Wherein  may  an  audit  differ  from  examination? 
1(32)  In  making  a  bank  examination  would  you  commence  at  the  start 
of  the   business   day  or  at  the  conclusion  of   the  business  day?     Uive 
reasons. 

*(«)  On  January  10th,  you  are  instructed  to  furnish  a  statement  of 
assets  and  liabilities  of  a  trading  concern  as  to  the  previous  December  3i8t. 
No  inventory  was  taken  on  that  date,  but  you  ascertain  that  the  inventory 
of  January  10th.  amounts  to  $7,689.25.  The  sales  ^^^^'\^J^^J^''^^^^^ 
to  Januarv  loth  amount  to  $945,  of  which  $300  was  shipped  but  not  billed 
prior  to  December  31st.  The  total  amount  was  billed  at  an  average  gr^^^^^ 
profit  of  twenty-five  per  cent  above  cost  The  goods  received  between 
December  31st  and  January  loth  cost  $678.25.  State  fully  how  you  would 
determine  the  figures  for  the  inventory  of  December  31st,  and  show  tne 
amount 

(u)  If  the  cash  in  bank  as  shown  by  the  cash  book  or  ledger  is  recon- 
ciled with  the  amount  shown  by  the  pass  book  or  certificate  obtamed  from 
the  bank,  is  it  necessary  to  check  the  pass  book  with  the  deposits  as 
shown  by  the  cash  book?  Give  reasons  for  your  answer,  stating  the 
nature  of  a  possible  irregularity  that  might  be  disclosed  by  such  detiil 
checking. 

218 


Questions  in  Auditing, 

U5)  What  measures  should  be  taken  to  ascertain  whether  or  not  any 
notes  receivable  have  been  discounted  and  cleared  from  the  books,  notwith- 
standing the  fact  that  they  are  not  due  and  at  maturity  will  be  subject 
to  demand  on  the  last  indorser  in  case  pa3mient  is  defaulted  by  the  maker? 

(36)  What  are  the  duties  of  an  auditor  as  to  examination  of  inventories 
of  finished  product,  product  in  process,  and  materials  and  supplies,  which 
have  been  taken  and  appraised  by  representatives  of  the  client,  in  case  he  is 
not  permitted  to  make  tests  for  the  purpose  of  satisiying  himself  as  to 
the  integrity  of  the  quantities  shown?  How  should  he  cover  such  a 
situation  in  his  report?. 


Auditing. 

Answers. 

(i)  A  systematic  inspection  of  all  books  of  accounts  and  subsidiary 
books,  the  object  being  to  prove  the  accuracy  of  all  transactions  therein, 
and  to  run  down  all  fraudulent  entries,  technical  errors  and  errors  of 
principle.  As  fraudulent  errors  are  covered  by  technical  errors,  a  thor- 
ough audit  is  desirable,  but  where  time  is  limited,  by  the  use  of  tests,  fair 
accuracy  can  be  attained. 

(2)  The  necessary  steps  to  verify  cash  receipts  and  payments  for  a 
period  including  resultant  cash  balance  are : 

First.  Verify  cash  receipts  by  checking  with  receipt  book,  if  one  is  kept, 
otherwise  with  record  of  deposits  made  as  shown  by  deposit  slips  or  with 
bank  pass  books. 

Second.  Verify  all  payments  with  proper  vouchers.  If  any  are  missing 
checks  properly  endorsed  may  be  used,  but  attention  should  be  called  to 
the  fact. 

Third.  Foot  cash  book  and  reconcile  balance  with  cash  on  hand  and  in 
bank,  by  counting  cash  and  by  proving  bank  balance  as  shown  by  pass 
book  or  bank  statement 

(3)  All  cash  received  should  be  deposited  and  all  payments  should  be 
made  through  bank.  Petty  cash  should,  when  necessary  or  every  month, 
be  reimbursed  by  check  drawn  to  order  of  petty  cash  and  charged  to  petty 
cash.  At  the  end  of  the  month  the  bank  pass  book  should  be  sent  to  the 
bank  and  the  balance  as  shown  by  the  bank  at  the  end  of  the  month  en- 
tered or  a  bank  statement  required.  Checks  paid  by  the  bank  during 
month  should  be  put  in  order  and  the  list  of  outstandings  drawn  off.  The 
bank  balance  less  outstandings  should  agree  with  balance  shown  by  the 
cash  book.  Balance  shown  by  petty  cash  book  should  agree  with  cash  on 
hand. 

(4)  First  a  careful  examination  of  the  method  of  keeping  the  books  and 
accounts  should  be  made  in  order  to  determine  the  most  likely  means  of 

219 


I  It 


i 


H 
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Accountancy  Problems  and  Solutions. 

V  -i„f,i«rinn     The  cash  balance  should  be  verified  by  count 

concealmg  »  d^^^'f  ?°-  J^^'b^^k  footed  and  proper  vouchers  seen  for 
and  bank  certificate,  the  casn  took  iu  f  compared 

.™«iHifiires     The  daUy  receipts  in  the  cash  book  snouio  u<=  ».     y 
expenditures,     i  ne  ua  >  ^  obtained  from  the  bank  to  ascer- 

with  daily  deposits,  the  deposit  slips  >>"'«  "'T'"  °  j  ,„  cover  an  old  de- 
tain that  the  receipts  of  one  day  have  not  «>««»  "^  ^^  ^"^^[/^^  ,,„t  »„ 
falcation.  In  addition,  if  permitted  to  do  so.  statements  ~  "f^"^ 
Mstomers  requesting  them  to  confirm  the  correctness  of  the  balances. 
^nr,^nfilation  should  be  obtained  of  ac«,unts  P-^^^  ""f /^^  °^_ 
Ttrding  paper  or  rediscounts.  Other  lines  of  investigation  will  be  sug 
stanaing  vw"  "  v,,«in«,  alwavs  bearing  in  mind  the  relation 

gested  by  the  nature  of  the  business,  always  oear    g  .,f,,„tio„ 

fo  the  cash,  as  that  is  almost  invariably  the  medium  of  a  defalcation. 

(S)  Show  machinery  as  an  asset  at  f,/°"  7'^;j';,fi;°:;:Vof 
other  side,  full  liability  for  unpaid  •^^^'^,'"*"    ^^'''^^^^^ 
course,  not  be  included  with  other  a<=f  ""^^Jf  ^^^^ ,  ",  J  7°  ,.  _.(  be 
as  a  separate  item  and  properly  labeled.    J^',/^''' ,f  °  ~,"° tern 
shown  tadoded  with  other  machinery  bat  should  ^P^"'''^^''"'^"^^ 
labelled  instalhnent  machinery  or  some  other  'PP^P^f  * ''*'^ .  ^^1!^ 
«m  for  this  is  that  as  a  going  concern  they,  to  aU  mtents  and  purposes, 
Z,  Ae  maciineiY  "en  Though  title  has  not  passed.    There  is  no  reason 
own  the  •»~P'-^y™  [      I     ^i„  „o,         the  balance  and  get  tiUe. 
to  assume  that  a  going  concern  wm  u^i  k  j  i:,Kiiitv 

PracticaUy.  therefore,  they  are  interested  in  die  amount  of  th"r  l.« 
for  unpaid  instalhnents  and  the  total  cost  of  the  machinery.  The  royalties 
on  the  output  would  be  a  charge  against  the  income  from  the  output. 

(6)  The  method  would  be  to  trace  each  debit  and  credit  »»  "^  °^'e'™'' 
source.  That  would  indude  the  inspection  of  paid  notes  charged  by  Ae 
S  and  should  also  include  an  analysis  of  interest  paid.  The  object 
^wt  to  ascertain  whether  there  were  any  Uabilities  on  accomit  of 
:^^y.U.  that  were  not  shown  on  the  books.  When  a  "^^  w-  P-d. 
as  shown  by  the  books,  it  would  be  necessary  to  assure  o"*^;/"  ^^T  ^^ 
had  not  been  renewed.  It  should  also  be  ascertamed  ''Aether  Ae  pro- 
ceeds of  notes  actually  went  into  the  business  and  were  not  convertea  oy 
a  partner  or  officer  to  his  own  use. 

(7)  (i)  Absolute  secrecy  concerning  dient's  affairs. 

(2)  Accuracy,  not  speed,  to  be  sought  for. 

(3)  Be  tactful 

(4)  Take  nothing  for  granted. 

(5)  When  in  doubt  as  to  matters  of  accounting,  refer  matter  to 
your  principal  or  your  office,  but  not  to  bookkeeper  or  dient. 

(8)  It  is  assumed  that  a  prindpal  and  at  least  three  assistants  are 
needed.  Eadi  man  should  be  given  a  time  statement  of  the  job.  whi* 
should  show  a  job  number  rather  than  the  name  of  client,  "should  be 
ruled  so  as  to  provide  for  different  kinds  of  work,  such  »'  f°°""f  f^" 
book,  diedcing  to  ledger,  etc..  showing  amount  ''P^"'  °"^^f  ^^  ° 
work.  To  the  prindpal  should  be  given  working  papers,  which  should 
least  contain  the  following: 


Anszvers  in  Auditing. 

(a)  Analysis  of  audit,  showing  at  top  the  several  months  comprised 
in  audit  and  at  the  side  the  different  steps  to  be  taken.  As  each  step  is 
completed  the  initials  of  man  in  charge  of  that  transaction,  whether  prin- 
cipal or  someone  designated  by  him,  should  put  his  initials  opposite  the 
description  and  under  the  proper  month. 

(b)  A  sheet  on  which  are  given  the  figures  of  trial  balance  at  end  of 
previous  period,  so  that  principal  may  parallel  figures  at  end  of  half  year. 
If  books  are  to  be  closed,  additional  column  should  be  provided  for  "  clos- 
ing and  adjusting"  entries,  and  finally  two  columns  left  for  condensed 
balance  sheet 

(d)  Forms  for  all  adjustments  made,  providing  space  for  a  full  descrip- 
tion. These  are  the  main  papers.  In  addition,  analysis  paper  and  a  con- 
venient form  for  notes  and  memoranda  are  handy. 

(9)  If  possible,  obtain  full  control  of  all  securities,  holding  them  long 
enough  to  list  them  as  to  date  of  maturity,  name,  amount  carried  on  book, 
interest,  rate,  par  value,  whether  negotiable  or  non-negotiable,  etc., 
whether  any  are  used  as  collateral  or  deposited  with  a  bank  or  other  in- 
stitution. Secure  a  certificate  to  that  effect.  They  should  be  verified  with 
stock  quotations,  and  where  this  is  impossible  through  other  sources  to 
obtain  their  fair  value;  also  that  a  proper  amount  has  been  set  aside  to 
take  care  of  bond  discount  and  bond  premium  accounts. 

(10)  Should  report  on  all  matters  germane  to  the  company's  affairs. 
Amount  of  cash  on  hand  and  in  bank;  verify  book  debts  receivable  and 
bills  receivable  as  well  as  the  accounts  and  bills  payable;  should  examine 
sales  journal  or  records,  purchase  receipts  and  disbursements,  checks  out- 
standing, amount  of  overdue  accounts  receivable  and  bills  receivable; 
verify  amount  of  inventory  by  percentage  tests  or  in  other  ways;  verify 
all  entries ;  verify  any  commissions,  pay-rolls,  petty  cash  items,  etc.,  all  of 
which  should  be  embodied  in  the  report  in  proper  form, 

(11)  Accountant  should  obtain  copy  of  will  and  inventory,  should  then 
prepare  an  accounting  from  the  check  book  and  other  records  to  verify 
the  executor's  accounting.  He  should  see  that  all  items  contained  in  the 
appraiser's  inventory  had  been  duly  accounted  for  and  that  no  property 
had  been  wrongfully  disposed  of.  Should  see  that  the  terms  of  the  will 
had  been  complied  with;  that  all  increase  in  values  and  securities,  and 
income  such  as  rents,  interest  on  mortgages,  etc.,  had  been  properly  col- 
lected and  accounted  for;  see  that  payments  for  testamentary  expenses 
are  properly  vouched  and  not  excessive,  as  well  as  any  expenditures  in- 
curred for  expenses  of  property  owned ;  should  examine  particularly  the 
schedule  of  debts  due  by  the  deceased ;  verify  the  amounts,  that  value  was 
properly  received,  and  whether  the  bills  are  properly  chargeable  to  the 
estate;  should  examine  carefully  payments  to  legatees  and  next  of  kin; 
verify  the  authority  for  payments  by  reference  to  the  will,  ascertaining  il 
payments  had  been  made  to  any  one  legatee  in  excess  of  his  share.     A 

221 


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Accountancy  Problems  and  Solutions. 

verification  of  advances  account  of  e^cutor's  commissions,  etc..  shoaW 
also  be  made  and  the  cash  balance  verified. 

(„)  Verification  of  cash  on  hand,  checks  o^tanding  ^sh  book  enti-^. 

r,j)  Tl,.  .»li.o,  .b«.M  be  guid^l  -i»ly  to  l.i-  i'l^'»"'^S  Z 

. .  •  1.    G^A.  *i,*.f«     Where  such  overdrawing  is  done  witn  me 

cond,t.ons  =«  ^e  fin^  tl^em.  JVbe«^-*  ,^^,  ^^  ^.^^  such  knowl- 
knowledge  of  the  firm  the  »"*»°'' ™°*  »,,  ,^  „  jj  j^  done  without 
edge,  the  matter  should  not  be  reported  at  aU_    ^Bere  « 

the  knowledge  of  the  firm  «  would  seem  as  «''°"«Vretu™rnTthe  mon^ 
anxious  to  have  the  firm  know  about  ''ll,'"""  ^f/ "™Lrch"n^^^^ 
before  the  audit  In  this  case  the  auditor  should  not  take  any  en  . 
M  AuJt^r  mention  it  to  the  firm  and  learn  whether  they  are  m  favor 
::t^h  aT-^Corwhetr  they  object  to  it  The  matter  if  brought 
to  the  attention  of  the  firm,  should  m,t  be  embodied  in  the  wntten  report 

(.4)  in  our  opinion,  the  profit  and  '<>-  '^tustss'^toXe^rd  iU 
farKed  siibstantianv  disc  ose  the  progress  of  the  tousmess  lo  a^tc 
St'ontthrdafe.  with  the  exception  that  an  insufficient  aUowance  has 
been  made  for  losses  in  collection  of  accounts  receivable. 

fic')  The  arrangement  of  the  report  will  be  as  follows: 
Wrst   DreseLtion  page  addressed  to  client,  setting  forth  the  object  of 
First  presentauon  p-gc  »  „„„.   ,  „x  .,~s  of  comments  and  the 

the  engagement  and  stating  the  number  ot  pages  ««  "' 
designating  letter  or  nmnber  of  «ich  staten,ent  and  ^_^^^ 

Second,  comments  on  extraordinary  features  of  the  ^^'^^^^^^^^^^ 
the  order  of  the  items  as  they  appear  in  the  attached   statemenU  and 

'^W.'Exhibit  A,  balance  sheet,  with  reference  opposite  the  respective 

items  to  attached  schedules.  .  .^uiw*  A    sehed- 

Fourth.  Exhibit  A.  schedule  I.  accounts  ««"'»"'=:  '*^'"*f;  ,^Mt 

de  n.  bils  receivable;  exhibrt  A,  schedule  III.  accomits  payable;  exhibit 

A.  schedule  IV,  bills  payable.  .  .,.„,.  .i,.^ 

Fifth.  Exhibh  B.  statement  of  profit  and  loss,  referring  to  balance  sheet 

after  balance  in  (he  profit  and  loss  account 

,.       . „  _„»  -j.<,t„  what  kind  of  an  insurance  company 

fi61  The  question  does  not  state  wnai  luuu  «i  ~  a-i-.  _» 


Answers  in  Auditing, 

which,  with  regard  to  investments,  vary  considerably.  Accountants  us 
well  as  insurance  men  are  not  uniform  with  regard  to  the  valuation  of 
bonds  in  the  financial  statement.  Some  advocate  cost,  others  market 
value.  The  argument  is  always  advanced  that  the  purchase  of  securities 
does  not  differ  from  the  purchase  of  any  other  asset  which  would  be 
recorded  at  its  cost  value.  On  the  other  hand  it  must  be  borne  in  mind 
that,  regardless  of  the  amount  paid  for  the  purchase  of  bonds,  at  maturity 
they  will  not  realize  more  than  the  par  value  and  therefore  the  premium 
paid  on  the  acquisition  of  bonds  should  be  charged  to  a  separate  account, 
not  to  the  bond  account.  The  latter  account  is  to  show  the  amount  which 
the  bonds  will  realize  at  maturity — par. 

The  scientific  method  of  treating  such  purchases  on  th*;  balance  sheet 
is  to  show  on  the  asset  side  the  par  value  of  the  bonds  as  one  item,  and 
the  premitmi  on  the  bonds  as  a  separate  item.  At  maturity  the  bonds  wiM 
realize  the  par  value.  The  premium  paid  at  the  purchase  has  to  be  made 
good  from  the  interest  received  on  the  bonds,  it  has  to  be  amortized. 
There  cannot  be  any  question  that  if  not  for  the  high  rate  of  interest  that 
the  bonds  bear  the  company  would  not  pay  such  a  premium,  if  any  at  all. 
That  being  the  case  the  premium  has  to  be  made  good  out  of  the  interest 
receipts. 

Taking  it  for  granted  that  the  interest  is  paid  semi-annually  the 
insurance  company  would  have  ten  interest  periods.  At  each  period 
the  company  would  collect  $1,750,  part  of  which  should  represent  the 
amortization  of  the  premium  paid.  To  amortize  the  total  premium 
($8,000)  each  interest  period  as  collected  or  at  the  end  of  the  fiscal  year  has 
to  be  burdened  with  its  share  ($800).  Therefore,  instead  of  crediting 
the  interest  account  with  the  full  sum  $1,750.00  collected,  $800.00  would 
be  credited  to  the  premium  account,  the  balance  of  $950.00  would  go  to 
the  interest  account.  Another  method  may  be  adopted;  to  credit  the 
interest  for  the  full  sum  collected  and  then  subsequently  to  charge  the 
interest  account  with  $800.00  and  to  credit  the  premium  account  with  it. 
The  result,  of  course,  would  be  the  same. 

(17)  If  an  auditor  finds  a  wrong  classification  of  expenditures  he  must 
adjust  the  accounts  by  means  of  adjustment  entries.  If  a  capital  ex- 
penditure has  been  charged  to  profit  and  loss  accotint  the  profits  or  losses 
for  the  period  under  review  are  understated.  A  secret  reserve  has  by  this 
method  been  created.  If,  on  the  other  hand,  an  expense  item  has  been 
charged  to  an  improvement  account  the  error  is  more  grave.  While,  as 
far  as  correct  accounting  is  concerned — expressing  exact  facts — either 
error  must  be  adjusted,  from  a  conservative  point  of  view,  however,  the 
first  error  can  find  some  justification,  but  surely  not  the  second.  If  the 
auditor  has  to  certify  to  the  condition  of  the  firm,  which  we  must  assume 
he  has,  he  .cannot  do  so,  unless  he  has  made  all  the  adjustments  with  re- 
gard to  capital  and  revenue  expenditures. 

(18)  When  goods  are  sent  out  on  consignment,  a  "Consignment 
Outward"  account  should  be  debited  for  the  cost  of  the  goodo  shipped. 

223 


, iccouniancy  ProMems  and  Solutions, 


Answers  in  Auditing, 


11 


This  accoiint  shotild  also  be  debited  far  all  additional  outlays,  viz.: 
cartage,  freight,  etc.  The  cofresponding  credits  should  be  in  the  first 
instance  to  merchandise  sales,  in  the  second  case  cash,  if  paid  in  cash. 

otherwise  to  the  individual  creditor's  account. 

When  the  consignee  renders  his  account  sales  we  debit  the  consignee 
m  his  remittance  (cash),  if  he  remits,  and  credit  "Consignment  Sales." 
We  might  credit  the  "Consignment  Outward*'  account  and  the  result 
would  be  the  same.  It  is,  however,  better  practice  to  so  subdivide  and 
classify  the  accounts  that  each  account  would  show  at  any  time  a  definite 
result* 

It  will  be  noticed  that  the  consignee's  deductions  are  not  treated  at  aU. 
To  the  consignor  it  does  not  matter  much  whether  he  records  that  he 
realized  $1,500  for  his  goods,  from  which  $200  were  deducted  by  the  con- 
signee, resulting  in  a  net  return  of  $1,300.  or  that  his  net  return  is  $1,300, 
regardless  of  what  the  deductions  were. 

Another  method  of  recording  the  account  sales  is  to  show  the  gross 
sales  and  charge  against  it  all  expenses.  The  advantage  in  this  case  is 
that  the  selling  expenses  of  the  consigned  goods  would  be  recorded,which 
is  not  the  case  in  the  first  method. 

(19)  "Extra  Services"  could  only  then  be  passed  by  the  auditor,  when 
the  by-laws  of  the  company  provide  for  such  expenditures.  If  the  by-laws 
do  not  provide  for  it,  he  must  find  out  whether  this  extra  remuneration  has 
been  voted  by  the  stockholders  in  general  meeting.  The  auditor  must 
also  verify  whether  the  bonus  was  not  in  excess  of  the  provisions  for  the 
remuneration,  if  such  provision  exists. 

(20)  An  auditor  of  a  firm  or  corporation  would  be  warranted  in  revising 
the  form  and  wording  of  a  balance  sheet  before  attaching  his  certificate. 
It,  ol  course,  depends  on  the  actual  extent  of  his  certification.  Thus 
where  he  is  reasonably  assured  that  the  certified  balance  sheet  is  only  for 
the  use  of  the  owners  of  the  firm,  providing  that  the  wording  is  not  mis- 
leading, he  is  not  warranted  in  revising  it.  On  the  other  hand,  if  the 
certified  balance  sheet  is  to  be  used  for 'outsiders,  which  is  true  in  the 
majority  of  cases,  then  he  must  word  his  balance  sheet  and  arrange  it  in 
siicli  form  m  to  most  clearly  show  the  true  financial  condition  of  the  firm. 

(2 1)  The  auditor  has  to  verify  whether  the  amount  charged  to  the  Capital 
Stock  Account,  in  the  stock  ledger,  does  not  exceed  the  authorized  issue 
of  stock.  He  has  also  to  verify  that  the  allotment  is  valid  and  that  it 
has  been  made  to  bona  fide  applicants.  He  must  also  verify  that  the  stock 
has  been  paid  for  either  in  cash,  property  or  labor  (the  latter,  labor,  in  the 
State  of  N.Y.).  Fraudulent  issues  of  stock  may  have  been  made,  which 
would  not  be  disclosed  if  the  auditor  were  not  to  verify  the  stock  ledger. 
The  cash  received  for  an  issue  of  stock  may  not  have  been  recorded, 
this  would  be  revealed  by  the  verification  of  the  stock  ledger. 

It  is,  however,  questionable  whether  a  full  examination  of  the  stock 
ledger  is  part  of  an  ordinary  audit. 


(as)  Mr.  Montgomery  in  "Dicksee's  Auditing"  (American  edition) 
gives  the  following  reasons  in  favor  of  continuous  auditing: 

(i)  The  examination  occurs  sooner,  and  consequently  any  errors 
committed  are  more  quickly  detected  and  rectified. 

(3)  The  periodical  visits  of  the  auditor  keep  the  bookkeeper  closer 
up  to  his  work. 

(3)  A  more  detailed  audit  is  practicable. 

(4)  The  audit  can  be  completed  soon  after  the  closing  of  the  books, 
without  unduly  hurrying  the  examination. 

(23)  The  duties  of  a  public  accountant  as  an  independent  auditor  are  to 
make  examinations  for  particular  purposes,  such  as  for  bondholders,  stock- 
holders, prospective  partners;  to  uncover  fraud,  and  also  to  make  com- 
plete audits  for  the  purpose  of  verifying  the  entries  on  the  books  and  for 
the  purpose  of  certifying  to  the  financial  condition  of  the  company  as 
evidenced  by  its  balance  sheet.  The  Public  Accountant  as  an  independent 
auditor  should  not  hesitate  in  making  the  truth,  the  whole  truth  and 
nothing  but  the  truth,  known,  no  matter  whom  it  may  hurt.  As  an  inde- 
pendent auditor  he  should  be  capable  of  handling  all  kinds  of  accounts. 
He  is  responsible  not  only  to  the  concern  for  whom  he  is  working,  but 
also  to  the  general  public  for  the  correctness  of  his  verification.  In  addi- 
ton  to  the  duties  already  mentioned  he  may  also  be  called  in  in  cases  con- 
cerning receiverships,  trusteeships,  consolidation  of  corporations,  etc 

(24)  The  cash  account  balance  as  represented  in  the  cash  book  is  the 
true  balance  according  to  the  books.  To  reconcile  the  pass  hook  with  that 
balance  you  must  subtract  from  the  bank  balance  any  checks  issued  and 
not  yet  returned  to  the  bank,  and  also  the  amount  of  the  cash  in  the  cash 
drawer.     Thus : 

Cash  Received.  Cash  Paid. 

John  Jones   $1,000.00  John  Smith,  check  No.  i . .  $500.00 

Henry  Good,  check  No.  2.  40.00 

Petty  cash  20.00 

Balance 440.00 


$1,000.00 


$1,000.00 


If  check  No.  2  was  not  returned,  the  bank  pass  book  balance  would  be 
$500;  from  this  amount  subtract  $40  check  not  returned  and  $20  in  cash 
drawer,  which  would  give  $440  balance  as  per  cash  book.  The  balance  in 
the  pass  book  should  be  confirmed  by  a  statment  from  the  bank  certifying 
to  its  correctness.  It  has  occurred  many  times  that  pass  books  have  been 
duplicated  and  that  the  auditor  has  been  deceived  by  believing  in  its 
correctness.  I 

(25)  In  verifying  stocks  and  fcdads  owned,  the  auditor  should  insist 
upon  their  production  and  a  personal  examination  of  the  same  and,  in 

225 


1 


: 


Accouiiimicy  Prablems  md  Solutions. 

addition,  lie  should  consider  their  present  market  value,  and  also,  if  he 
has  any  suspicion,  examine  them  as  to  their  genumeness  .-   ,  .     " 

Bills  and  notes  receivahle  or  accounts  receWable  should  ^^  yj"^^^  ^ 
commtinication  with  the  debtors  Where  this  "^^^^^^.^"^^^^^^^^^ 
deemed  advisable,  the  next  best  thing  to  do  .s  to  examine  the  notes  in  the 
possession  of  the  concern,  ascertain  whether  any  "*>!*^^..^*^.%^.^"  *^^^ 
counted  at  the  bank,  for  which  there  is  a  contingent  I'^^ilipr ;  divide  the 
accounts  and  notes  into  good  and  doubtful  and  Per^aps  ^ad.  ^^-^^^ 
M  accounts  would  be  those  past  due  or^long  outstanding  ^^  J^^^^^^^^^ 
advisable  to  communicate  with  these  debtors,  because  it  is  possible  that 
a  mistake  has  been  made  or  fraud  committed.  So  ^r  as  book  v^hies  and 
real  worth  are  concerned,  we  should  never  certify  to  the  hook  values  of  an 
account  which  we  considered  had  and  we  should  not  in  addition  ^^^^Z 
the  full  book  value  of  a  doubtful  account  without  setting  up  a  reserve 
for  bad  debts. 

(26)  In  the  previous  answer  we  have  practically  outlined  the  procedure 
asked  for  in  this  question.  In  addition  to  this  and  in  extreme  cases  il 
might  be  necessary  to  compare  the  commercial  standing  of  the  debtors 
with  a  commercial  agency  guide.  A  method  used  by  some  ^^f^^'^^ 
ascertain  the  correctness  of  accounts  receivable  is  to  postpone  the  audit 
until  the  first  of  the  month  and  then  to  send  statements  to  the  debtors. 
If  the  debtors  have  paid  and  the  money  fraudulently  used,  the  df>t«>'- J*»* 
quickly  notify  the  house  of  such  payment.  Before  rniy  of  the  above 
procedure  is  gone  through  all  the  accounts  should  be  checked  back  frorn 
the  ledger  into  the  books  of  original  entry.  A  statement  should  be  made 
by  the  auditor  containing 

(a)  Names  and  amounts  of  good  accounts; 

(b)  Names  and  amounts  of  doubtful  accounts; 

(c)  Names  and  amounts  of  bad  accounts. 

A  sufficient  reserve  should  be  set  up  against  loss  by  reason  of  bad 
accounts  before  the  auditor  can  give  his  certificate. 

(27)  It  is  necessary  that  the  auditor  should  inspect  the  minutes  of  the 
stockholders'  and  the  directors*  meetings  in  order  to  verify  transactions 
which  appear  on  the  books,  such  as  issuance  of  bonds,  increase  of  stock. 
salary  of  directors.  The  authorization  for  any  entry  affecting  such  items 
should  emanate  from  the  minutes  of  either  stockholders'  or  directors 
meetings.  If  he  is  refused  access  to  these  records  he  should  plainly  state 
these  facts  in  his  report  Many  auditors  would  not  undertake  an  audit 
where  access  to  such  records  would  be  refused. 

(28)  If  a  certified  balance  sheet  is  requested  by  a  concern  that  regularly 
takes  notes  from  its  customers  in  payment  of  their  accounts  and  which 
ire  sometimes  discounted  at  the  bank,  it  will  be  necessary  to  set  up  a  con- 

tiegent  liability.  caJied  Notes  Receivable  Discounted,  because  of  the  fact 

226 


Answers  in  Auditing. 

that  in  the  event  of  any  of  these  notes  not  being  paid  by  the  makers  at 
maturity  the  bank  will  come  to  us  for  payment,  and  therein  lies  the  con- 
tingent liability.    The  journal  entries  would  be  as  follows: 

Upon  receiving  the  notes: 

Notes  receivable   $100.00 

To  X    $100.00 

Upon  discounting  the  notes : 

Cash    $99.00 

Discount    1.00 

To  notes  Receivable  Discounted $100.00 

Then  there  appears  on  the  debit  side  of  the  balance  sheet  an  asset  con- 
sisting of  Notes  Receivable,  $i 00.00,  and  on  the  credit  side  an  offsetting 
contingent  liability  of  Notes  Receivable  Discounted,  $100.00. 

(29)  An  ordinary  bank  check  drawn  by  a  concern,  payable  to  the  Re- 
ceiver of  Taxes  and  properly  endorsed  by  him  would  not  be  a  suflScient 
voucher  for  the  payment  of  the  taxes  of  that  concern  because  that  check 
might  be  for  the  payment  of  taxes  on  other  property  and  not  on  the  prop- 
erty under  consideration.  A  good  voucher  in  such  a  case  would  be  a  check 
properly  dated  and  made  out,  on  which  it  has  written,  "For  payment  of 
taxes  on  (description  of  property,  at  No.  17  X  Street,  New  York  City)." 
A  voucher  check  would  be  good  evidence. 

(30)  The  following  matters  should  be  presented  in  the  accountant's 
report : 

(i)  Valuation  of  the  assets,  such  as  plant,  machinery,  merchandise, 
accounts  and  notes  receivable  of  each  plant. 

(2)  Liability,  fixed  and  current,  of  each  plant. 

(3)  Statement  showing  gains  or  losses  for  the  past  five  or  six  years 
of  each  plant. 

(4)  Average  per  cent,  of  gain  or  loss  on  investments  of  each  plant. 

(5)  Statement  of  the  capital  accounts  of  each  company. 

(31)  An  audit  may  differ  from  an  examination  inasmuch  as  an  audit 
is  a  complete  official  examination  of  the  books  and  financial  condition  of  a 
concern,  while  an  examination  may  be  conducted  for  some  special  purpose 
only,  as  an  examination  conducted  by  minority  stockholders;  a  bond- 
holders' examination  for  the  purpose  of  ascertaining  a  man*s  interest  in 
a  concern;  an  examination  conducted  for  the  purpose  of  uncovering 
fraud,  etc. 

(32)  in  making  a  bank  examination  it  is  better  to  start  at  the  beginning 
of  the  day  than  at  the  close  of  the  business  day,  because, 

(i)  Everything  is  intact — that  is,  all  the  books  are  written  up;  all  the 
money  has  been  counted  and  turned  over  to  the  first  teller. 

(2)  All  the  securities  and  moneys  are  in  the  vault  untouched. 

(3)  Any  changes  in  the  first  teller's  cash  can  easily  be  detected  by  a 
comparison  with  his  report  of  the  night  previous. 

227 


Accountancy  Problems  and  Solutions. 

,,)  The  auditor  can  secure  J^-^^^^f^ ^  ^S  ^^  S 
the  morning  mail  -h.ch^^-"!  ^  "  *^:„^''and  securities  from  it  only 
keeping  the  »='*<=/*=^*<'  ""^.j^^^  Z  withdrawal  of  the  same.  The 
after  he  has  made  his   notttion  ot  ine  .„oants  and  moneys 

emoloyees  of  a  bank  might  very  easdy  fix  up  their  accoun 
employees  "•  «  .     business  day. 

if  the  audit  began  at  the  close  ot  tne  m. 

fSrc^%T":rT;"fhissum£ea.the 

between  Uie  P-«f^--j;  rrhtdTnOe^lS"!  which  is  $7,767.00. 

give  us  the  amount  of  goods  on  nanu 
The  proof  of  this  is  shown  thus- 


Inventory  December  31st..... 
Purchases    .,.,....••• 


$7,767.00 

678.25 


Deduct  sales  at  'COSt •  ■ '  • 

Present    inventory * 


8.445-25 
756.00 


.$7,689.25 


(3,)  in  order  to  trace  the  receipts  of  ^^^^^Z:^^:,:,^  S 
whL  such  receipts  have  been  deposited  ^Z^^^^^^JZ\h.i^r.m  be 
Ae  pass  book  with  t^he  cash  book.     The  ™  ^^^  ,„d  „„( 

disclosed  by  such  checking  »°";<'^,'r"'l"„'„f  ^ep^shed  on  the  same  day 
'^''''  d  u^r-by'lCr^c^'ecr^arcat:  into  the  business,  such 
rerr„fwIdXtS  by  this  detailed  checking.  ^^ 

(3,)  The  notes  receivable  account  -°"';!.'^!;?,'°  ^'t^f  ^otV'has  not 
credU  side  of  this  account  showed  a  cred,    »«*/";„„„  ,how 

nuitnred  as  yet.  the  ^'=^-.<»  'V^'n^epaYd  or  d  sTounted.    If  it  was  dis- 
whether  the  note  in  question  w''^  P"?^  °'  ^e  preparation  of  financUl 
~,..„.fH   there  is  a  contingent  liability,  and  in  tne  prepi 
^Xl':;  contingent  liability  should  be  mentioned. 

if  k  advisable  for  the  auditor  to  have  a  statement 
(36)   In  such  case  it  is  f  ^'^^^  \^  *^^^^^^^  .^gard  to  the  valuation  of 

signed  by  the  parties  who  ^-- /"^^^        ''^^^^^^^    .^ate  this  fact  in  his 
the  inventory.    It  is  always  safer  for  tne  auaiwr 

report. 


Questions  and  Answers  in  Commercial  Law. 

G)mmercial  Law. 

Questions  and  Answers. 

I.  What  is  a  corporation?  Describe  the  procedure  necessary  for  the 
formation  of  a  business  corporation,  and  show  what  is  required  as  to 
(a)  number  of  incorporators,  (b)  number  of  directors,  (c)  capital  to  be 

paid  in. 

Answer.  Lord  Coke's  definition  of  a  corporation. — "  A  corporation  ag- 
gregate of  many  is  invisible,  immortal,  and  rests  only  in  intendment  and 
consideration  of  the  law.  They  cannot  commit  treason,  nor  be  outlawed, 
nor  excommunicated,  for  they  have  no  souls,  neither  can  they  appear  in 
person,  but  by  attorney.  A  corporation  aggregate  of  many  can't  do  fealty, 
for  an  invisible  body  can  neither  be  in  person  nor  swear;  it  is  not  subject 
to  imbecilities  or  death  of  the  natural  body  and  divers  other  cases."  In 
re  Sutton's  Hospital  (10  Coke's  Rep.  i,  32),  decided  in  1683. 

Seymour  Thompson's  definition  of  a  corporation. — "  A  private  corpora- 
tion is  a  voluntary  union  of  persons,  joined  together  by  written  articles 
of  association  or  incorporation  under  legislative  authority,  or  by  special 
statute  on  proper  application  to  the  legislature,  to  accomplish  some 
pecuniary  or  ideal  purpose  authorized  by  the  governing  body  of  a  state. 
Its  leading  features  are  that  it  has  a  continuous  succession  during  the 
period  prescribed  for  its  existence,  an  individual  name  by  which  it  may 
enter  into  contracts  and  sue  and  be  sued,  acting  as  a  unit  in  respect  to  all 
matters  within  the  scope  of  the  purposes  for  which  it  is  created,  and  a 
distinct  existence  or  legal  entity  separate  and  distinct  from  the  natural 
persons  composing  it.  The  essential  idea  of  a  corporation  is  that  it  has 
*  The  capacity  to  exist  and  act  within  the  powers  granted,  as  a  legal  en- 
tity, apart  from  the  individual  or  individuals  who  constitute  its  mem- 
bers.'" (Andrews  Bros.  Co.  vs.  Youngstown  Coke  Co.,  30  C.  C.  A.  293, 
86  Fed.  585;  I  Ky.  Corporations,  70.)  Thompson  on  Corporations,  Sec- 
ond Edition,  Sec.  2. 

Chief  Justice  Marshall's  definition  of  a  corporation. — "  A  corporation  is 
an  artificial  being,  invisible,  intangible,  and  existing  only  in  contemplation 
of  law.  Being  the  mere  creature  of  law,  it  possesses  only  those  proper- 
ties which  the  charter  of  its  creation  confers  upon  it,  either  expressly  or 
as  incidental  to  its  very  existence.  These  are  such  as  are  supposed  best 
calculated  to  effect  the  object  for  which  it  was  created.  Among  the  most 
important  are  immortality,  and,  if  the  expression  may  be  allowed,  indi- 
viduality; properties  by  which  a  perpetual  succession  of  many  persons  are 
considered  as  the  same,  and  may  act  as  a  single  individual.  They  enable 
a  corporation  to  manage  its  own  affairs,  and  to  hold  property  without  the 
perplexing  intricacies,  the  hazardous  and  endless  necessity,  of  perpetual 
conveyances  for  the  purpose  of  transmitting  it  from  hand  to  hand.  It  is 
chiefly  for  the  purpose  of  clothing  bodies  of  men  in  succession  with  these 
qualities  and  capacities  that  corporations  were  invented,  and  are  in  use. 
By  these  means,  a  perpetual  succession  of  individuals  are  capable  of  act- 

229 


I 


Accountancy  Problems  and  Solutions. 

mg  for  the  promotion  of  the  particiilir  object,  like  one  immortal  thing." 
Per  Chief  Justice  Marshall,  in  Dartmouth  College  Case,  Dartmouth  Col- 
lege vs.  Woodward,  4  Wheat  518. 

A  business  corporation  is  formed  in  New  York  under  the  Business  Cor- 
porations Law  (Ch.  4  of  the  Consolidated  Laws  of  1909)  as  follows: 

Prepare  three  (3)  copies  of  a  certificate  of  incorporation.  These  cer- 
tificates should  he  signed  and  acknowledged  by  the  incorporators.  Send 
two (2)  of  them  to  the  Secretary  of  State,  with  directions  that  one  (i) 
be  filed  and  the  other  be  returned  as  a  certified  copy  of  the  original.  The 
fees  of  the  Secretary  of  State  are  Ten  ($10.00)  Dollars  for  filing  the  cer- 
tificate, and  fifteen  (.15)  cents  per  folio  for  recording;  for  certifying  the 
copy.  One  ($1.00)  Dollar.  At  the  same  time  the  organization  tax  should 
be  sent  to  the  State  Treasurer.  The  tax  amounts  to  fifty  (.50)  cents 
per  thousand  dollars  of  the  total  authorized  capital  stock  stated  in  the 
certificate ;  minimum  tax,  Five  ($5-00)  Dollars.  The  State  Treasurer  will 
send  one  receipt  to  the  Secretary  of  State,  who  will  attach  it  to  the  cer- 
tificate of  incorporation,  together  with  a  statement  of  the  amount  and 
date  of  payment  of  the  tax,  and  will  then  file  and  record  the  certificate 
of  incorporation  and  will  notify  the  person  from  whom  he  received  it  that 
it  has  been  filed.  The  State  Treasurer  will  also  send  a  duplicate  receipt 
to  the  remitter,  which  duplicate  receipt  should  be  attached  to  the  third 
copy  of  the  certificate,  which  is  termed  a  duplicate  original— the  other 
original  being  filed  by  the  Secretary  of  State.  The  duplicate  original 
should  then  be  filed  in  the  office  of  the  County  Clerk  in  which  the  prin- 
cipal office  of  the  company  is  to  be  located.  The  County  Clerk's  fees  are : 
Filing  fee,  six  (.06)  cents  per  folio;  recording  fee,  ten  (.10)  cents  per  folio. 

The  certificate  of  incorporation  should  contain  the  following  clauses: 

(i)  The  name  of  the  proposed  corporation,  which  must  be  in  the 
English  language,  and  must  not  conflict  with  the  name  of  any  existing 
domestic  corporation  or  of  any  foreign  corporation  authorized  to  do 

business  in  the  state.  The  name  should  not  contain  any  of  the  follow- 
ing words:  "Trust,"  "bank,"  "hanking,*'  "insurance,"  "assurance," 
"indemnity,**  "guaranty,"  "guarantee,"  "title,"  "savings,"  "invest- 
ment," "  loan,**  "  benefit,"  "  college,"  or  "  university.*' 

(2)  The  purpose  or  purposes  for  which  it  is  to  be  formed.  A  cor- 
poration may  be  formed  in  New  York  State  for  any  lawful  purposes 
other  than  those  provided  for  by  the  moneyed  corporations  law,  the 
banking,  the  insurance  the  railroad,  the  transportation  corporations  law 
and  the  education  law.  Corporations  may  not  be  formed  in  New 
York  to  practice  law,  medicine  or  dentistry.  (Business  Corporations 
Laxv,  Sections  2  and  2a.) 

(3)  The  amount  of  the  capital  stock,  and,  if  any  portion  be  preferred 
stock,  the  preferences  thereof.  Preferred  stock  may  be  deprived  of 
voting  power.    (People  vs.  Kocnig,  133  App.  Div.  756.) 

(4)  The  number  of  shares  of  which  the  capital  stock  shall  consist, 
each  of  which  shall  not  be  less  than  Five  ($5-«>)  Dollars,  nor  more  than 

230' 


Questions  and  Answers  in  Commercial  Law. 

One  Hundred  ($100.00)  Dollars,  and  the  amount  of  capital  not  less 
than  Five  Hundred  ($500.00)  Dollars,  with  which  said  corporation  will 
begin  business. 

(5)  The  city,  village  or  town  in  which  its  principal  business  office  is 
to  be  located,  and,  if  in  New  York  City,  the  borough  therein  in  which 
it  is  to  be  located. 

(6)  Its  duration,  which  may  be  perpetual. 

(7)  The  number  of  its  directors,  no  less  than  three  (3). 

(8)  The  names  and  post-office  addresses  of  the  directors  for  the  first 
year.  At  least  one  of  the  directors  must  be  a  resident  of  the  State  of 
New  York.  The  directors  need  not  be  incorporators  or  subscribers  for 
stock.     (163  N.  Y.  423.) 

(g)  The  names  and  post-office  addresses  of  the  subscribers  to  the 
certificate,  and  a  statement  of  the  number  of  shares  of  stock  each  agrees 
to  take  in  the  corporation.  The  incorporators  should  consist  of  three 
or  more  natural  persons  of  full  age,  at  least  two-thirds  (%)  of  whom 
must  be  citizens  of  the  United  States,  and  at  least  one  a  resident  of  the 
State  of  New  York.  Each  incorporator  must  subscribe  for  at  least  one 
(i)  share  of  stock. 

2.  (8)  May  directors  of  a  corporation  convey  the  property  of  the  cor- 
poration to  themselves?    Give  reasons. 

Answer.  Three  views  obtain  in  the  United  States  as  to  the  validity  of 
contracts  between  directors  and  the  corporation. 

I.  Such  contracts  are  voidable  but  not  void,  and  are  therefore  bind- 
ing on  the  directors  at  the  option  of  the  corporation.  Bar  vs.  Ry.,  125 
N.  Y.  263  (1891)  ;  Veeder  vs.  Horstmann,  85  App.  Div.  154  (1903).  No 
question,  therefore,  as  to  the  fairness  or  unfairness  of  the  contract  is 
involved.  Munson  vs.  Ry.,  103  N.  Y.  58  (1886)  ;  Carpenter  vs.  Taylor, 
164  N.  Y.  171  (1900). 

Same  views  obtain  in: 

Indiana — Port  vs.  Russell,  36  Ind.  60. 

Wisconsin — Haywood  vs.  Lincoln  Lumber  Co.,  64  Wis.  639,  26 
N.  W.  124. 

California — Wilber  vs.  Lynde,  49  Ga.  290,  19  Am.  Rep.  645. 

Maryland— Ko&msLn,  etc.,  Co.  vs.  Cumberland,  etc.,  Co.,  16  Md. 
456,  77  Am.  Rep.  311. 

n.  The  second  view  is  not  so  rigid  as  the  first.  The  courts  that  fol- 
low this  view  hold  that  contracts  between  directors  and  their  corpora- 
tions are  voidable,  but  are  presumptively  valid.  However,  they  may  be 
challenged  and  avoided  for  any  lack  of  good  faith.  This  view  prevails 
in  most  jurisdictions : 

New  Jcrsey—Stew3iTt  vs.  Lehigh  Valley  R.  Co.,  38  N.  J.  L.  505. 
United  Sfofw— Leavenworth  County  vs.  Chicago,  etc.,  R.,  134  U.  S. 
688,  10  S.  Ct.  Rep.  708,  33  L.  Ed.  1064. 

231 


iliiilllUlilil 


Accountancy  Problems  and  Solutiom, 

III.  The  third  view  holds  that  contracts  will  depend  for  their  validity 
on  the  circumstances  surrounding  each  case,  though  the  courts  will 
scrutinize  such  contracts  more  carefully  than  ordinary  contracts: 

iCflfiKM^Thonias  vs.  Sweet,  37  Kan.  183,  14  Pac.  545- 
Penmylmma—Uskmmond^s  Appeal,  123  Pa.   St.  503,  16  Atl.  419. 
Smith  Carolina— GSL  Cent.  R.  vs.  Claghorn,  i  Speers  Eq.  545. 

F^riwaiil— Rogers  vs.  Danby,  etc.,  Soc,  19  Vt  187. 

Sometimes  contracts  between  the  corporation  and  its  directors  are  sanc- 
tioned by  by-laws.    The  by-laws  of  the  U.  S.  Steel  Corporation  provide: 

"  Inasmuch  as  the  directors  of  this  Company  are  men  of  large  and  di- 
versified business  interests,  are  likely  to  be  connected  with  other  corpora- 
tions with  which  from  time  to  time  this  Company  must  have  business 
dealings,  no  contract  or  other  transaction  between  this  Company  and  any 
other  corporation  shall  be  effected  by  the  fact  that  directors  of  this  Com- 
pany are  interested  in  or  are  directors  or  officers  of  such  other  corpora- 
tions, if,  at  the  meeting  of  the  board,  or  of  the  committee  of  this  Company, 
making,  authorizing  or  confirming  such  contract  or  transaction,  there  shall 
be  present  a  quorum  of  directors  not  so  interested ;  and  any  director  in- 
dividtially  may  be  a  party  to,  or  may  be  interested  in,  any  contract  or 
transaction  of  this  Company,  provided  that  such  contract  or  transaction 
shall  be  approved  or  be  ratified  by  the  affirmative  vote  of  at  least  ten  di- 
rectors not  so  interested." 

A  somewhat  late  case  in  New  York,  Polhemus  vs.  Polhemus,  114  App. 
Div.  781,  100  N.  Y.  S.  263  (1906),  holds  that  there  is  no  presumption  of 
fraud  as  to  the  actions  of  directors  in  selling  corporate  property  to  another 
director.  Under  this  decision  the  contract  could  be  avoided,  but  the  stock- 
holders would  have  to  bear  the  burden  of  proving  fraud. 

3.  For  what  kind  of  property  may  a  corporation  issue  its  capital  stock 
in  payment?    Explain  fully. 

Answer.  Section  SS  of  the  Stock  Corporation  Law  in  the  State  of  New 
York  provides: 

"  No  corporation  shall  issue  either  stock  or  bonds  except  for  money, 
labor  done  or  property  actually  received  for  the  use  and  lawful  purposes 
of  such  corporation." 

It  has  been  held  in  the  case  of  Rafferty  w.  Gas  Company,  37  App.  Div. 
618  (1899),  that  the  phrase  "lawful  purposes"  means  those  purposes 
which  are  not  foreign  to  the  purposes  of  the  corporation.  The  phrase. 
it  is  said,  is  to  be  given  a  liberal  construction. 

4.  When  the  capital  of  a  corporation  is  increased,  what  persons  have 
a  prior  right  to  subscribe  for  the  new  stock,  and  in  what  proportions? 
May  such  right  be  made  negotiable,  and  if  so,  how? 

Answer.  The  old  stockholders  have  a  right  to  purchase  the  new  stock 
pro  rata  before  it  may  be  offered  to  outside  investors.  However,  a  price 
may  be  fixed,  not  less  than  par,  and  if  the  stockholders  are  given  an  op- 
portunity to  take  stock  at  that  price  in  proportion  to  their  holdings,  and 

33a 


Questions  and  Answers  in  Commercial  Law. 

the  offer  is  not  accepted,  the  stock  may  be  sold  at  the  advanced  price  and 
the  stockholders  may  not  insist  upon  taking  the  stock  at  par. 

"When  the  stock  is  issued  in  pajmient  for  property  purchased  by  the 
corporation,  the  stockholders'  right  is  merged  in  the  purchase,  and  they 
have  an  advantage  in  the  increase  of  the  property  of  the  corporation  in 
proportion  to  the  increase  in  stock." 

"And  if  so  situated  that  he  could  not  take  it  himself,  he  was  entitled 
to  sell  the  right  to  someone  who  could,  as  is  frequently  done."  These 
quotations  are  from  Judge  Vann's  opinion  in  Stokes  vs.  Continental  Trust 
Co.,  186  N.  Y.  28s  (1906). 

The  privilege  of  purchasing  new  stock  belongs  to  the  remainder-man 
and  not  to  the  life  tenant  Richwood  vs.  Richman,  127  App.  Div.  117,  108 
N.  Y.  S.  298. 

The  right  is  made  negotiable  by  the  corporation,  which  sends  a  negotia- 
ble notice  to  each  shareholder  of  the  number  of  shares  to  which  he  is 
entitled. 

The  following  notice  copied  from  the  Wall  Street  Journal,  issue  of 
November  5,  1909,  fully  explains  the  modern  method  of  making  subscrip- 
tion rights  negotiable : 

THE  PENNSYLVANIA  RAILROAD  COMPANY. 


NOTICE   TO    STOCKHOLDERS. 


Philadelphia,  Pa.,  November  1st,   1909. 

At  a  meeting  of  the  Board  of  Directors  lield  this  date  the  following  resolution  was 
adopted : 

"  RESOLVED  That,  pursuant  to  the  consent  and  authority  given  and  conferred  by 
appropriate  action  duly  taken  by  this  Company's  stockholders  for  increasing  its  capital 
stock,  and  for  the  purpose  of  providing  the  funds  necessary  to  meet  maturing  obliga- 
tions of  the  Company,  and  for  other  corporate  purposes,  an  increase  of  this  Company's 
capital  stock  equal  to  twenty-five  centum  of  the  aggregate  amount  thereof  which 
shall  be  issued  and  outstanding  at  the  close  of  business  on  the  fifteenth  day  of 
November,  1909,  is  hereby  authorized  and  directed,  and  the  same  shall  be  issued  and 
disposed  of  in  manner  following: 

The  privilege  of  subscribing  for  said  stock  at  par  $50  per  share,  on  December  8th, 
and  to  and  inclusive  of  December  i8th,  1909,  on  which  latter  date  the  privilege 
will  cease,  is  hereby  given  to  stockholders  as  they  shall  stand  registered  on  the  books 
of  the  Company  at  the  close  of  business  on  November  isth,  to  the  extent  of  twenty- 
five  per  centum  of  their  respective  holdings. 

The  terms  of  subscription  will  be  as  follows: 

Payments  may  be  made  in  three  instalments,  or  they  may  be  made  in  full,  viz.: 

The  first  instalment,  30  per  cent.,  or  $15.00  per  share,  at  the  time  of  making  the 
subscription,  between   December  8th  and  December   i8th,   1909, .  inclusive. 

The  second  instalment,  30  per  cent.,  or  $15.00  per  share,  between  February  ajrd 
and  March   ist,    1910,   inclusive. 

And  the  third  instalment,  40  per  cent.,  or  $20.00  per  share,  between  May  26th  and 
Jnne  ist,  19 10,  inclusive. 

Payments  in  full  at  the  time  of  making  the  subscription,  between  December  8th 
and  December  i8th,   1909,  inclusive. 

23$ 


.  ( 


rtH 


1 


Accotintancy  Problems  and  Solutions, 

Warrants    will    be   issued    by   the  Treasurer   to   each  f<^^^^^''':.Zfl^,^ 
amoimt  of  stock  to  which  he  is  entitled  to  subscribe  under  this  P"^^'  '^"^^^^^^ 
privilege  may  be  sold  by  any  stockholder,  the   warrants  to  have  thereon  *  ««^"^  ^^ 
assignment  therefore.     The  warrants,  accompanied  by  the  paymen    for  ^^^  «"*  '^ 
ment.  shall  he  returned  by  the  stockholders  to  the  Treasurer  ^'^^'J^^^f^f  "™°2^^^ 
«d  December   i8th.   .909.  inchisiw.  and  if  not  so  returned,  and  the  first  mstalment 
so  paid,  the  warrants  shall  be  void  and  of  no  value.  „,„„,„*  of  the  fint 

The  Treasurer  will  issue,  on  snrrender  of  the  warrants  and  payment  °f  »»^« J^"* 
instalment,   receipts  which   will  be  assignable  and  which   are  to  be   '^^^^Jl^h^ 
Treasurer  at  the  time  of  the  payment  of  the  second  mstalment    whereupon  ^««'^*bk 
receipts  covering  the  first  and  second  instalment  payments  will  be  issued,  which 
to  be  surrendered  to  the  Treasurer  on  payment  of  the  third  instalment. 

Upon  payment  of  the  last  instalment  there  will  be  issued  a  f -''_^-  "^^^^^l  »* 
the  rate  of  six  per  centum  per  annum  on  the  fir«t  m.talmcnt  from  December     g  h 

1909.  and  on  the  second  instalment  from  March   ist,   1910.  all  up  to  June  ist.   1910, 

which  will  amount  to  $0.63  per  share.  ^      e.u       a  rt^^u-r.  .Rth 

To  subscribers  making  payment  in  full  between  December  8th  ^"^  ^°«='™};*'"  'f;^^^^ 
,909.  inclusive,  and  to  those  making  payment  of  the  last  instalment  ^f^f".*^^^/"" 
and  June  ist,  1910.  inclusive,  full  paid  negotiable  stock  receipts  will  be  issued  for 
whole  shares,  exchangeable,  ten  days  after  payment,  for  stock  certificates  carrying 
all  dividends  thereafter  declared. 

For  fractional  shares,  full  paid  stock  receipts  will  be  issued  upon  payments  m  f u  1 
or  upon  payment  of  the  last  instalment.  They  will  not  carry  any  dividend  or  interest, 
hnt  will  be  convertible  into  stock  when  the  fractions  presented  make  whole  shares 
pmvideii  such  conversion  is  made  on  or  before  October  31st.   1910.     ^fter  April  30th 

1910.  such  fractional  stock  receipts  issued  upon  paym«its  in  full,  or  after  Oc  ober 
31st,  1910.  fractional  receipts  issued  upon  payment  of  the  last  instalment  will  he 
redeemed  in  cash  at  the  rate  of  $50  !)er  share,  without  interest. 

Fractional  receipts  will  pass  by  delivery.  „^^Ua^ 

The  right   to   receive   stock  shall  accrue  to   any   stockholder  under  this   privilege 

nnless  the  terms  of  subscription  are  fully  complied  with  and  payments  made  at  the 

dates  hereinbefore  stated,  and  no  subscription  or  assignment  of  the  privilege  will  tie 

recognized  unless  made  on  the  forms  furnished  by  the  Company. 


Warrants  will  be  mailed  about  November  23rd,  to  stockholders  of  record  November 
15th.  1909,  who  who  have  filed  permanent  dividend  orders  in  this  office,  to  the 
addresses  indicated  on  such  orders,  and  where  dividends  are  collected  by  bankers 
brokers  or  others  on  powers  of  attorney  or  other  authority,  the  warrants  will  be  sent 
to  such  authorized  parties  for  delivery  to  the  stockholders,  unless  other  instructions 
are  received  relative  thereto  prior  to  November  ^3rd,  1909.  .j,r,iiv<zKvn     TO 

ALL     COMMUNICATIONS     BY     MAIL     SHOULD     BE     ADDRESSED     TO 

THE  TREASURER  AT   PHILADELPHIA. 

jAMWi  F.  Fahnestock. 

Treasurer 

5  What  are  the  advantages  of  incorporating  a  business?  For  what 
piiropses  may  corporations  he  formed  in  Illinois?     Name  exceptions,  if 

anir 

Answer.  The  main  advantages  of  the  corporate  form  of  doing  business 
has  been  summarized  by  Professor  W.  H.  Lough  in  his  "Corporation  Fi- 
nance'* as  follows: 

«  (i)  Flexibility.— The  owners  of  a  corporation  may  be  few  or 

numerous.    This  makes  the  corporate  form  especially  well  adapted  to 

collecting  large  amounts  of  capital  by  means  of  small  contributions  from 

a  great  many  people. 

234 


3 


Questions  and  Answers  in  Commercial  Law, 

"  (2)  Permanence. — The  life  of  a  corporation  is  not  dependent  on 
the  life  or  on  the  caprice  of  any  individual. 

"  (3)  Centralization  of  Control.— Under  the  corporate  form  the 
officers  of  the  corporation  within  carefully  defined  limits  exercise  com- 
plete controL  « 

"  (4)  Transferability  of  Ownership. — Corporate  shares  may  be 
readily  sold  either  in  a  block  or  piecemeal  and  have  a  wide  market 

"  (5)  Limited  Liabiuty. — ^The  corporation  alone,  with  certain  minor 
exceptions,  is  liable  for  its  own  debts  and  the  shareholders  cannot  lose 
more  than  their  original  investment." 

A  so-called  incorporating  company  in  New  York  City  prepared  the  fol- 
lowing statement  to  show  the  advantages  of  a  corporation  over  a  part- 
nership : 

In  a  Partnership.— I.  You  are  liable  to  the  full  extent  of  your  own 
property  for  firm  debts.  If  a  judgment  against  the  partnership  cannot 
be  satisfied  out  of  firm  assets,  each  partner  will  be  individually  liable 
for  the  full  amount  of  the  deficit. 

II.  Your  partner  has  as  much  authority  in  the  conduct  of  the  firm 
business  as  yourself.  Your  credit  is  at  the  mercy  of  your  partner.  By 
hiring  an  incompetent  employe,  by  engaging  in  speculation,  by  an  indis- 
creet contract  or  by  dishonesty  he  can  cause  you  the  loss  of  everything 
you  have  in  the  world. 

III.  Your  partner's  death,  insanity  or  bankruptcy  immediately  dis- 
solves the  partnership.  A  very  valuable  good-will,  perhaps,  will  have  to 
be  sold  at  a  sacrifice  to  clear  up  the  partner's  estate.  Thus,  irreparable 
damage  will  be  done. 

IV.  Your  partner  may  desire  to  lend  money  to  the  firm.  He  will  have 
to  wait  for  payment  of  his  loan  till  all  the  firm  creditors  are  paid. 

V.  You  may  desire  to  add  a  new  partner  to  the  business,  either  be- 
cause he  is  an  extraordinarily  competent  man,  or  because  he  will  invest 
capital.  The  dissent  of  a  single  member  of  your  firm  can  keep  out  such 
a  desirable  man. 

VI.  You  may  desire  to  wind  up  your  interest  in  the  concern,  but  if 
your  partner  refuses  to  permit  you  to  withdraw,  you  will  have  to  resort 
to  long  and  expensive  litigation. 

yil.  You  may  desire  to  obtain  new  capital  for  the  business,  but  you 
will  find  that  because  you  are  a  partnership  it  will  be  difficult  to  ne- 
gotiate a  loan. 

In  a  Corporation.— I.  As  a  stockholder  you  are  subject  to  absolutely 
no  liability,  outside  of  the  amount  invested  in  the  stock  of  the  corpora- 
tion. A  creditor  of  a  corporation  can  satisfy  his  claim  out  of  the  assets 
of  the  corporation  only. 

II.  A  stockholder,  as  such,  has  no  power  to  incur  any  liability  for 
the  corporation  or  for  any  other  stockholder.  He  is  not  an  agent  for 
either  unless  he  is  specially  appointed.  In  no  case  can  you,  as  a  stock- 
holder, be  made  liable  for  more  than  you  have  invested. 

235 


Accoun^tancy  ProMems  and  SoluHom. 


Questions  and  Answers  in  Commercial  Law. 


II 


III.  Your  fellow  stockholder  may  die.  become  insane,  or  go  Oirougii 
bankmiitcy,  but  the  corporation  wiU  not  be  affected ;  it  will  continue  its 
business  as  though  nothing  had  happened.  The  only  change  that  will 
be  made  will  be  the  substitution  of  a  new  stockholder  for  the  old  one. 
The  coBtinuance  of  a  corporation  may  be  perpetual  if  it  is  so  desired. 

IV.  You,  as  a  stockholder,  may  lend  money  to  the  corporation;  you 
will  be  entitled  to  payment  as  soon  and  in  the  same  proportion  as  out- 
side creditors. 

V.  Yon  can  secure  new  capital  very  easily  and  without  disturbing  the 
business  by  merely  issuing  stocks  or  bonds. 

VI.  You  have  two  means  of  raising  money :  first,  on  your  individual 
holding  in  the  company ;  second,  on  the  credit  of  the  corporation  itself. 
The  rights  of  all  parties  are  clearly  defined  in  a  corporation,  and  the 
business  can  be  easily  and  safely  managed. 

VII.  You  may  desire  to  withdraw  from  a  corporation;  you  can  do  so 
by  merely  selling  your  stock.    One  or  all  the  stockholders  may  thus  sever 
their  connection  with  the  corporation  without  working  its  dissolution. 
(See  also  answer  to  Question  ii.) 

Corporations  may  be  formed  under  the  general  corporation  law  of  Illi- 
nois for  any  lawful  purpose  except  banking,  insurance,  real  estate  broker- 
age, operation  of  railroads  and  the  business  of  loaning  money,  horse  or 
dummy  railroads.  Corporations  formed  for  the  purpose  of  constructing 
railroad  bridges  and  those  organized  for  the  purchase  and  sale  of  real 
estate  for  burial  purposes  only  are  permitted.  A  corporation  may  not  be 
organized  to  acquire  and  bold  land  upon  which  to  erect  a  building  to  lease 
and  to  collect  rents  from  it.  (Imperial  Building  Company  w.  Chicago 
Open  Board  of  Trade,  87  N.  E.  Rep.  167.) 

4  Must  each  share  be  paid  for  in  full  by  each  subscriber  to  an  Illinois 
corporation  before  a  certificate  of  stock  may  be  issued  to  him?  May 
capital  stock  be  paid  for  in  property? 

Answer.  Nothing  is  said  in  the  statute  prohibiting  the  issuing  of  a 
certificate  of  stock  to  a  subscriber  who  has  not  paid  for  it  in  full,  and  it 
would  seem,  therefore,  that  under  such  conditions  a  certificate  of  stock 
may  be  issued.    (See  Bates  vs.  Tel.  Co.,  134  Ili  548.) 

The  Illinois  statute  contains  no  provision  as  to  the  method  of  paying 
for  capital  stock,  but  the  courts  have  decided  that  capital  stock  may  be 
issued  for  labor,  property  or  other  valuable  consideration.  (Farwell  vs. 
Great  Western  Tel.  Co.,  161  111.  $32).  For  the  answer  to  this  question 
under  the  New  York  law,  see  question  No.  3  above. 

7.  A  stock  certificate  is  issued  to  the  original  subscriber  bearing  the 
printed  words  "full-paid  and  non-tsicisable,"  when  in  fact  it  was  only 
pirtly  paid  for ;  subsequently  it  is  told  and  assigned  to  a  purchaser  with- 
out notice  of  the  fact  that  it  is  not  paid  in  full.  What  remedy  has  a  cred- 
itor of  the  corporation  against  the  original  subscriber  and  against  the 
transferee? 


Answer.  Where  shares  are  issued  as  "full  paid"  innocent  purchasers 
are  protected  against  the  corporation  and  against  creditors.  (10  Cyc.  483, 
and  cases  there  cited.)  In  New  York,  Section  56  of  the  Stock  Corpora- 
tion Law  provides  that  the  stockhold'er  is  liable  up  to  the  amount  of  the 
unpaid  part  of  his  capital  stock  for  debts  incurred  while  he  was  a  stock- 
holder. Action  must  be  brought  to  enforce  this  liability  within  two  years 
of  his  ceasing  to  be  a  stockholder. 

8.  Has  the  holder  of  a  single  share  of  stock  the  right  to  inspection  of 
the  books;  if  so,  where  and  under  what  circumstances? 

Answer.  In  Illinois  every  stockholder  has  a  right  at  all  reasonable 
times  or  by  his  attorney  to  examine  the  records  and  books  of  account 
General  Corporation  Law,  section  13;  Rolling  Stock  Company  vs.  People, 
147  III  234. 

New  York  corporations  must  keep  books  of  account  and  a  stock  ledger. 
Any  stockholder  may  inspect  the  stock  ledger  during  at  least  three  business 
hours  daily  and  may  make  extracts  therefrom.  The  stock  ledger  must 
contain  the  names  of  all  stockholders  alphabetically  arranged,  residences, 
number  of  shares  held  when  became  owners,  and  amotmt  paid  thereon. 

Stockholders  have  no  right  in  New  York  to  inspect  books  of  account, 
but  instead  stockholders  holding  5%  (if  the  capital  stock  is  $100,000  or 
less)  or  3%  (if  the  capital  stock  exceeds  $100,000)  of  the  capital  stock 
may  demand  in  writing  from  the  treasurer  or  chief  fiscal  officer  a  de- 
tailed statement  embracing  all  assets  and  liabilities,  which  statement  must 
be  filed  within  thirty  days  in  the  corporation's  office,  and  must  be  open 
for  inspection  to  all  stockholders  for  a  period  of  twelve  months.  Only 
one  report  a  year  may  be  demanded.  Penalty  for  failure  to  comply  with 
the  law  is  $50,  and  $10  for  each  twenty-four  hours'  delay. 

9.  (a)  How  are  the  directors  and  the  president  of  a  Pennsylvania  cor- 
poration, which  was  formed  under  the  general  corporation  act  of  1874, 
chosen?  (b)  What  is  meant  by  stock  proxy?  (c)  What  is  meant  by  the 
authorized  capital?  (d)  Need  anything  be  paid  into  the  treasury  of  the 
company  before  it  starts?  (e)  If  the  company  fails,  to  what  extent  are 
stockholders  liable  for  its  unpaid  debts? 

Answer,  (a)  In  Pennsylvania,  directors  for  the  first  year  are  named 
in  the  certificate,  and  thereafter  are  chosen  at  the  annual  meeting.  Cumu- 
lative voting  must  prevail.     (Constitution,  Article  XVI,  Section  4.) 

The  rule  in  New  York  is  the  same  as  that  in  Pennsylvania,  except  that 
cumulative  voting  does  not  obtain  unless  provided  for  by  the  charter. 

(b)  Proxy  voting  is  voting  by  power  of  attorney.  In  Pennsylvania  a 
proxy  is  not  good  after  two  months  after  date.  No  blank  proxy  may  be 
given  nor  may  the  proxy  be  given  power  of  substitution. 

In  New  York  a  proxy  is  good  for  any  definite  period  mentioned  therein, 
otherwise  for  eleven  months  only. 

(c)  By  authorized  capital  is  meant  the  amount  at  par  which  the  stock- 
holders must  pay  for  all  the  capital  stock  or  shares  of  a  company.    It  is 

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fixed  by  the  organizers  at  the  time  of  organization  and  can  be  changed  by 
formal  amendment  only. 

(d)  In  Pennsylvania  io%  of  the  capital  stock  must  be  subscribed  for 
and  paid  into  the  treasury  before  the  application  for  charter  is  filed,  and 
one-quarter  of  the  capital  stock  must  be  paid  within  two  years. 

New  York  corporations  are  not  permitted  to  incur  debts  until  at  least 
$500  has  been  paid  in.  At  least  one-half  of  the  capital  stock  must  be  paid 
in  within  one  year. 

(e)  In  Pennsylvania  stockholders  are  liable  for  amounts  unpaid  on 
capital  stock  and  also  for  work  or  labor  done  not  exceeding  an  amount 
equal  to  the  amount  of  stock  held  by  the  stockholder. 

The  stockholders  of  New  York  corporations  are  liable  for  amounts  un- 
paid on  their  capital  stock,  and  are  jointly  and  severally  liable  for  all 
debts  due  and  owing  to  laborers,  servants  or  employees,  other  than  con- 
tractors, for  services  performed  by  them  for  such  corporation.  This 
liability  rests  on  the  pledgor  of  stock  and  on  the  estate  of  a  decedent  as 
distinguished  from  the  pledgee  and  the  personal  representative. 

10.  (a)  How  is  a  corporation  created?  (b)  Give  some  of  the  powers, 
rights  and  duties,     (c)   Give  a  general  rule  as  to  rights  of  members. 

Answer,  (a)  A  Pennsylvania  corporation  is  formed  by  performing  the 
following  steps: 

1.  Preparing,  executing  and  acknowledging  a  certificate  of  incorpora- 

tion. 

2.  Publishing  notice  of  intended  application  for  a  charter  once  a  week 
for  three  full  weeks  in  at  least  two  newspapers. 

3.  Filing  certificate  in  the  office  of  the  Secretary  of  the  Common- 
wealth. 

4.  Filing  proof  of  the  publication  of  notice  of  intention  to  apply  for 

charter. 

5.  Recording  charter  in  the  office  of  the  Recorder  of  Deeds. 

(See  answer  to  question  i  as  to  procedure  in  forming  New  York  cor- 
porations.) 

(b)  General  powers  of  corporations: 
(i)  To  sue  and  be  sued. 

(2)  To  use  a  seal. 

(3)  To  buy,  sell  and  hold  property. 

(4)  To  appoint  directors,  officers  and  agents. 

(5)  To  make  by-laws. 

(6)  To  dissolve  itself. 

(7)  To  do  all  things  necessary  to  carry  out  the  purposes  set  forth 
in  the  certificate  of  incorporation. 

(c)  Individual  rights  of  members: 
(i)  To  a  certificate  of  shares. 

(2)  To  transfer  shares. 

(3)  To  vote. 

(4)  To  inspect  corporate  records, 

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Questions  and  Ansivers  in  Commercial  Law. 

is)  To  dividends. 

(6)  To  preference  upon  increase  of  capital  stock. 

(7)  To  interfere  with  corporate  business  where  there  is  a  breach  of 
trust  on  the  part  of  the  officers  or  majority,  where  there  is  a  commis- 
sion of  ultra  vires  acts  on  the  part  of  the  corporation,  or  where  the  di- 
rectors or  majority  refuse  to  act  for  the  benefit  of  the  corporation. 

11.  (a)  What  is  a  corporation?  (b)  How  does  it  differ  from  a  partner- 
ship?   (c)  How  does  it  differ  from  a  joint  stock  company? 

Answer.    See  table  (pages  240  and  241). 

12.  (a)  What  is  the  meaning  of  the  word  "stock"  in  reference  to 
a  corporation?  (b)  What  does  it  represent?  (c)  How  is  it  transferred? 
(d)  What  right  have  stockholders  in  and  to  the  corporate  property? 

Answer,  (a)  By  stock  is  meant  the  interest  represented  by  certificates 
of  stock  which  the  stockholders  have  in  the  corporation. 

(b)  Stock  is  divided  into  equal  shares,  and  is  represented  corporeally 
by  certificates  of  stock.  It  represents  the  interest  which  the  stockholders 
have  in  the  corporate  property  and  in  the  management  thereof. 

(c)  Stock  is  transferred  by  assignments  in  blank  or  by  specific  assign- 
ments endorsed  on  the  certificates  of  stock.  In  most  states  the  transfer 
is  not  binding  on  the  corporation  until  it  has  been  registered  on  the  books 
of  the  company. 

(d)  Stockholders  have  no  direct  interest  in  corporate  property  except 
upon  dissolution. 

13.  Distinguish  clearly  between  public  corporations  and  private  corpora- 
tions. 

Answer.  Public  corporations  are  those  formed  to  accomplish  some 
public  purpose.  For  example,  a  municipality,  a  township  or  a  school  dis- 
trict is  a  public  corporation. 

A  quasi-public  corporation  is  one  organized  for  private  profit  and  by 
private  individuals  with  the  object  and  purposes  of  promoting  some  pub- 
lic enterprise.  They  are  sometimes  called  public  service  corporations. 
Examples:    Railroad,  canal,  gas  companies,  etc. 

Private  corporations  are  those  created  by  private  individuals  to  pro- 
mote and  prosecute  private  enterprises. 

14.  (a)  How  is  a  pledge  of  stock  usually  made?  (b)  Must  the 
pledgee  return  to  the  pledgor  the  identical  certificate  pledged?  (c)  Has 
the  pledgee  the  right  to  sell  or  to  repledge  the  stock? 

Answer,  (a)  A  pledge  of  stock  is  usually  made  by  simply  depositing 
a  certificate  with  the  pledgee. 

(b  and  c)  "  While  as  a  general  rule  the  pledgor,  upon  discharge  of  his 
obligation,  is  entitled  to  the  return  of  the  specific  property  pledged,  cor- 
porate stock  stands  on  a  different  footing;  and  in  the  absence  of  a  spe- 
cial agreement  the  pledgee  is  not  liable  for  their  conversion  by  reason  of 
his  sale  or  other  disposition  of  the  identical  certificates  delivered  to  him, 

239 


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so  long  as  he  retaiiis  at  all  times  an  eqial  number  of  shares  of  the  same 
class  and  value  to  be  delivered  to  the  pledgor  upon  discharge  of  his  obu- 
gation/'    (10  Cyc  Bss-^f  citing  Morton  vs.  Morgan,  19  N.  Y.  170.) 

IS  What  is  meant  by  uUra  vires  m  to  an  ad  of  a  corporation? 
Explain  and  give  an  example  of  such  an  act. 

Answer.  **  The  contracts  of  corporations  are  said  to  be  ultra  vires 
when  they  involve  some  adventure  or  undertaking  not  withm  the  scope 
of  their  charter,  which  is  their  rule  of  corporate  action."  {heshtvs,  Lorit- 
lard,  HO  N.  Y.  519.)  H.  ^^  example,  an  Illinois  corporation  contracted  to 
acquire  real  estate  on  which  to  build  an  office  building,  not  for  its  own 
immediate   needs,   the   contract   would   be  ultra  vires.     (See  answer  to 

question  5.)  . 

As  to  the  rights  of  parties  under  ultra  vires  contracts,  two  rules  pre- 
vail in  this  country.  In  the  United  States  courts  and  m  the  courts  ot 
Alabama,  Massachusetts,  Tennessee  and  some  other  states  an  ultra  vtres 
contract  cannot  be  enforced  by  either  side,  but  if  one  side  has  performed 
its  contract  it  may  recover  for  the  benefits  the  other  side  has  received. 
In  Indiana,  Illinois,  New  York,  Pennsylvania  and  many  other  states  the 
obligation  of  an  ultra  vires  contract  may  not  be  resisted  by  a  party  who 
has  received  benefits  thereunder.  Courts,  in  general,  will  not  rip  open 
fully  executed  ultra  vires  contracts,  nor  will  they  lend  their  aid  to  the  en- 
forcement of  ultra  vires  contracts  wholly  unexecuted. 

16.  Give  in  a  general  manner  requirements  of  the  law  governing  the 
organization  of  corporations  in  the  State  of  Rhode  Island,  and  state  what 
class  of  corporations  can  be  organized  under  the  general  laws. 

A'nswer.  The  general  laws  require  that  in  order  to  form  a  corporation 
any  number  of  persons,  not  less  than  three,  all  of  lawful  age,  may  file 
articles  of  association  in  the  office  of  the  Secretary  of  State,  together  with 
a  receipt  from  the  general  Treasurer  showing  that  the  organization  tax 
has   been   paid.     The   Secretary   of   State   then   issues   a    certificate   of 

incorporation.  -^   .   k 

Within  thirty  days  after  organization,  a  certificate  venfied  by  the 
Treasurer  or  other  authorized  officer  must  be  filed  with  the  Secretary  of 
State.  This  certificate  must  set  forth  the  name  of  the  corporation;  the 
date  of  organization;  the  amount  of  capital  stock  paid  in  on  organization; 
the  town  in  which  it  is  located;  and  the  name  and  address  of  its  treasurer, 
and  if  he  be  a  non-resident,  there  should  be  filed  a  copy  of  a  power  of 
attorney  duly  authenticated  appointing  some  competent  person  residing 
in  the  State  as  attorney  to  receive  service  of  process.  Manufacturing 
corporations  must  record  with  the  town  clerk  in  which  the  main  factory 
is  established  a  certificate  of  payment  of  capital  stock  within  ten  days 
after  the  last  payment 

Corporations  may  be  formed  under  the  general  laws  for  any  purpose, 
except  insurance,  banking  or  for  the  purpose  of  trading  in  bonds,  notes 
or  other  evidences.    By  Article  IX  of  the  Amendments  of  the  Constitution 

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Questions  and  Answers  in  Commercial  Law. 

of  the  State,  no  corporation  shall  be  created  under  the  general  laws 
with  power  to  excercise  the  right  of  eminent  domain  or  to  acquire 
franchises  in  the  streets  and  highways  of  towns  and  cities. 

17.  A  corporation  called  The  Western  Trading  Company  was  in- 
corporated under  the  laws  of  the  State  of  Illinois.  A  certificate  of 
complete  organization  was  issued  by  the  Secretary  of  State  and  everything 
necessary  to  constitute  this  a  "  de  jure  "  corporation  was  done  except  to 
record  the  certificates  in  the  office  of  the  Recorder  of  Deeds  of  Cook 
County,  the  principal  office  of  the  company  being  in  Chicago.  After  the 
company  was  thus  organized,  its  president  ordered  some  bonds  engraved  by 
the  American  Bank  Note  Company,  and  the  bonds  not  being  paid  for  on 
delivery,  the  work  thus  ordered  having  been  charged  to  the  Western  Trad- 
ing Company  on  the  books  of  the  plaintiff  company  and  bills  rendered 
accordingly,  the  latter  company  sued  the  president  of  the  Western  Trading 
Company  for  the  contract  price  of  the  work.  The  court  gave  judgment 
for  the  plaintiff  on  the  ground  that  the  Western  Trading  Company,  not 
having  filed  in  the  office  of  the  Recorder  copy  of  its  articles  of  incorpora- 
tion, as  required  by  law,  was  incapable  of  contracting  and  could  not  be 
held  liable  on  this  contract.    Give  your  opinion  in  this  case. 

Answer.  In  Illinois  the  General  Corporation  Law,  Section  18,  provides: 
"  If  any  person  or  persons,  being  or  pretending  to  be  an  officer  or  agent 
or  Board  of  Directors  of  any  stock  corporation,  or  pretended  stock 
corporation,  shall  assume  to  exercise  corporate  powers  or  use  the  name 
of  any  such  corporation,  or  pretended  corporation,  without  complying  with 
the  provisions  of  this  act,  before  all  stock  named  in  the  articles  o! 
incorporation  shall  be  subscribed  in  good  faith,  then  they  shall  be  jointly 
and  severally  liable  for  all  debts  and  liabilities  made  by  them  and  con- 
tracted in  the  name  of  such  corporation,  or  pretended  corporation."  On 
a  statement  of  facts  similar  to  those  in  the  question,  it  was  held,  in  the 
case  of  Loverin  vs.  McLaughlin,  161  111.  417,  that  the  president  was 
liable.  That  case  was  cited  with  approval  in  Butler  Paper  Company  vs. 
Cleveland,  228  111.  128.  For  the  law  in  most  States  see  answer  to  question 
No.  24. 

18.  Under  what  circumstances  may  the  directors  of  a  corporation 
be  liable  for  dividends  paid  ?  Explain  fully,  and  state  to  whom  the  direc- 
tors are  liable. 

Answer.  Section  28  of  the  Stock  Corporation  Law  of  the  State  of 
New  York  provides:  "The  directors  of  a  stock  corporation  shall  not 
make  dividends,  except  from  the  surplus  profits  arising  from  the  business 
of  such  corporation,  nor  divide,  withdraw  or  in  any  way  pay  to  the  stock- 
holders, or  any  of  them,  any  part  of  the  capital  of  such  corporation,  or 
reduce  its  capital  stock,  except  as  authorized  by  law.  In  case  of  any 
violation  of  the  provisions  of  this  section,  directors,  under  whose  adminis- 
tration the  same  may  have  happened,  except  those  who  may  have  caused 
their  dissent  therefrom  to  be  entered  at  large  upon  the  minutes  of  such 

243 


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Accauntancy  Problems  and  Solutions. 

directors  at  the  time,  or  were  not  present  when  the  '^'J'^  h»PP^"'^|^;] 
jointly  and  severally  be  liable  to  such  corporation  ""^  »  ^^^^'"^ 
thereof,  .o  the  full  amount  of  any  loss  sustamed  "^J"*  .^^^^''^X. 
its  creditors  respectively  by  reason  of  such  withdrawal,  division  or  reddc 

'"section  604  oi  the  Penal  Law  provides  in  part  as  *°"7;  =  "  ^ Jj'^f ", 
of  a  stock  corporation  who  concurs  in  any  vote  or  act  of  Ae  *^°'^  °* 
such  corporation,  or  any  of  them,  by  which  .t  .s  intended:  To  m^e  a  *v 
idend,  except  from  the  surplus  prohts  arising  from  the  bu^nes    of  the 
corporation,  in  the  cases  and  manner  allowed  by  law  »  *  *  is  guilty  ot 

"it^irseen,  therefore,  that  the  directors  are  liable  to  the  corporation, 

to  the  creditors  and  to  the  State. 

,9.    State  the  procedure  necessary  in  New  York  State  for  dissolving 
a  corporation.  , 

Answer.    Corporations  may  be  voluntarily  or  i"^***"^*^"^^^^^^^^ 
The  question  seems  to  require  the  procedure  for  -'^^^f^'J . f ^^^^^^^^^^ 

A  corporation  may  be  dissolved  by  voluntary  proceedmgs  in  one  of  two 

"^  The  first  method  is  governed  by  Section  221  of  the  General  Corporation 

Law.  which  provides  as  follows :  meetinir 

"The  board  of  directors  of  any  such  corporation  may,  at  a  meeting 
called  for  that  purpose,  upon  at  least  three  days'  notice  ^^J^"^^^^^^^ 
by  a  vote  of  a  majority  of  the  whole  board,  adopt  a  '■^^f "  «^\ *^*^^  ** 
is  in  their  opinion  advisable  to  dissolve  such  corporation  forthwith,  and 
thereupon  shall  call  a  meeting  of  the  stockholders  ^^°^^J^?  P"^^^^^^^^^ 
voting  upon  a  proposition  that  such  corporation  be  f^""^^'^  ^^f^^^ 
Such  meeting  of  the  stockholders  shall  be  held  not  less  than  thirty  nor 

more  than  sixty  days  after  the  adoption  of  ^^^VrlfT  ^'Inr!  !hTbe 
of  the  time  and  place  of  such  meeting  so  called  by  the  directors  shall  be 
published  in  one  or  more  newspapers  published  and  circulating  m  the 
county  wlierein  such  corporation  has  its  principal  office,  at  least  once  a 
week  for  three  weeks  successively  next  preceding  the  time  appointed  for 
holding  such  meeting,  and  on  or  before  the  day  of  the  first  pubhcabon  of 
such  notice  a  copy  thereof  shall  be  served  personally  on  each  stockholder, 
or  mailed  to  him  at  his  last  known  post-office  address.     Such  meeting 
Shai  be  held  in  the  city,  town,  or  village  in  which  the  last  preecedmg 
annual  meeting  of  the  corporation  was  held,  and  said  meeting  may,  on 
the  day  so  appointed,  by  the  consent  of  a  majority  in  interest  of  the  stock- 
holders present,  be  adjourned  from  time  to  time,  and  notice  of  such  adjourn- 
ment shall  be  published  in  the  newspapers  in  which  the  notice  of  the  meet- 
inir  was  published.    If  at  any  such  meeting  the  holders  of  two-thirds  m 
amount  of  the  stock  of  the  corporation  then  outstanding  shall,  m  person  or 
by  attorney,  consent  that  such  dissolution  shall  take  place  and  signify  such 
consent,  in  writing,  then  such  corporation  shall  file  such  consent,  attested 
by  its  secretary  or  treasurer,  and  its  president  or  vice-president,  together 


Questions  and  Answers  in  Commercial  Law. 

with  the  powers  of  attorney  signed  by  such  stockholders  executing  such 
consent  by  attorney,  with  a  statement  of  the  names  and  residences  of  the 
then  existing  board  of  directors  of  said  corporation,  and  the  names  and 
residences  of  its  officers  duly  verified  by  the  secretary  or  treasurer  or 
president  of  said  corporation,  in  the  office  of  the  Secretary  o!  State. 

The  Secretary  of  State  shall  thereupon  issue  to  such  corporation,  m 
duplicate,  a  certificate  of  the  filing  of  such  papers  and  that  it  appears 
therefrom  that  such  corporation  has  complied  with  this  section  in  order 
to  be  dissolved,  and  one  of  such  duplicate  certificates  shall  be  filed  by 
such  corporation  in  the  office  of  the  clerk  of  the  county  in  which  such 
corporation  has  its  principal  office ;  and  thereupon  such  corporation  shaU 
be  dissolved  and  shall  cease  to  carry  on  its  business,  except  for  the  pur- 
pose of  adjusting  and  winding  up  its  business.    The  board  of  directors 
shall  cause  a  copy  of  such  certificate  to  be  published  at  least  once  a 
week  for  two  weeks  in  one  or  more  newspapers  published  and  circulating 
in  the  county  in  which  the  principal  office  of  such  corporation  is  located, 
and  at  the  expiration  of  such  publication,  the   said  corporation,  by  its 
board  of  directors,  shall  proceed  to  adjust  and  wind  up  its  business  and 
affairs,  with  power  to  carry  out  its  contracts  and  to  sell  its  assets  at 
public  or  private  sale,  and  to  apply  the  same  in  discharge  of  debts  and 
obligations    of  such  corporation,  and  after  paying  and  adequately  provid- 
ing for  the  payment  of  such  debts  and  obligations,  to  distribute  the  balance 
of  assets  among  the  stockholders  of  said  corporation,  according  to  their 
respective  rights  and  interests. 

Said  corporation  shall  nevertheless  continue  in  existence  for  the  purpose 
of  paying,  satisfying  and  discharging  any  existing  debts  or  obli^tions. 
collecting  and  distributing  its  assets,  and  doing  all  other  acts  required  in 
order  to  adjust  and  wind  up  its  business  and  affairs,  and  may  sue  and  be 
sued  for  the  purpose  of  enforcing  such  debts  or  obligations,  until  its 
business  and  affairs  are  fully  adjusted  and  wound  up. 

After  paying  or  adequately  providing  for  the  debts  and  obligations  of 
the  corporation,  the  directors  may,  with  the  written  consent  of  the  holders 
of  two-thirds  in  amount  of  the  capital  stock,  sell  the  remaining  assets 
or  any  part  thereof  to  a  corporation  organized  under  the  laws  of  this  or 
any  other  state,  and  engaged  in  a  business  of  the  same  general  character, 
and  take  in  payment  therefor  the  stock  or  bonds,  or  both,  of  such  corpora- 
tion and  distribute  them  among  the  stockholders,  in  lieu  of  money,  in  pro- 
portion to  their  interest  therein,  but  no  such  sale  shall  be  valid  as  against 
any  stockholder  who  within  sixty  days  after  the  mailing  of  notice  to 
him  of  such  sale  shall  apply  to  the  supreme  court,  in  the  manner  provided 
by  Section  17  of  the  Stock  Corporation  Law  for  an  appraisal  of  the  value 
of  his  interest  in  the  assets  so  sold  unless  within  thirty  days  after  such 
appraisal  the  stockholders  consenting  to  such  sale,  or  some  of  them,  shall 
pay  to  such  objecting  stockholder,  or  deposit  for  his  account,  in  the  manner 
directed  by  the  court,  the  amount  of  such  appraisal,  and  upon  such  pa3rment 
or  deposit  the  interest  of  such  objecting  stockholder  shall  vest  in  the 
person  or  persons  making  such  payment  or  deposit." 

245 


■IIIIH 


: 


l> 


AccoMtmncy  Problems  and  Solutions. 

Aeotlicr  method  of  dissolving  a  corporation  is  provided  by  the  General 
Corporation  Law.  Under  this  method,  whenever  the  management  of  a 
corporation  is  equally  divided  so  that  there  is  a  deadlock,  or  whenever 
the  assets  are  insufficient  to  pay  all  just  demands,  or  whenever  the  direc- 
tors deem  it  benefical  to  the  interests  of  the  stockholders  to  dissolve  the 
corporation,  a  petition  may  be  presented  to  the  Supreme  Court  praying  for 
a  final  order  dissolving  the  corporation.  The  petition  must  set  forth  in 
full  the  financial  condition  of  the  company,  with  an  inventory  of  the  prop- 
erty, of  the  books,  vouchers,  securities,  indebtedness,  etc.  An  order  is 
then  procured  requiring  all  persons  to  show  cause  why  the  corporation 
should  not  be  dissolved.  This  order  is  published  at  least  once  in  each 
of  the  three  weeks  immediately  preceding  the  time  fixed  therein  for  show- 
ing cause,  in  one  or  more  newspapers,  specified  in  the  order,  published 
in  the  city  or  county  wherein  the  order  is  entered.  A  referee  may  be 
appointed.  In  a  proper  case  the  court  will  then  make  a  final  order  dis- 
solving the  corporation  and  appointing  one  or  more  receivers  of  its  prop- 

2Xk  (a)  How  are  foreign  corporations  authorized  to  transact  business 
in  Michigan?  (b)  And  what  franchise  fee  is  required  from  them?  (c) 
How  is  a  corporation  created  in  Michigan?  (d)  And  how  many  in- 
corporators are  required  by  law?  (e)  What  is  the  minimum  and  maxi- 
iniim  authorized  capital  at  which  corporations  may  capitalize  in  Mich- 
igan? (f)  How  may  the  dissolution  of  a  corporation  be  effected,  and  (g) 
for  w^hat  particular  reason  would  a  corporation's  charter  be  forfeited? 

Answer,  (a)  Foreign  corporations  may  obtain  authority  for  transact- 
ing business  in  Michigan  by  procuring  a  certificate  of  authority  from  the 
Secretary  of  State.  The  procedure  for  obtaining  this  is  as  follows:  File 
with  the  Secretary  of  State  a  certified  copy  of  corporation's  charter  and 
evidence  of  the  appointment  of  an  agent  on  whom  service  of  process  can 
be  made;  pay  the  requisite  recording,  filing  and  franchise  fees;  file  a 
statement  sworn  to  by  at  least  two  of  the  following  officers:  President, 
secretary,  treasurer  or  superintendent.  This  statement  should  contain  the 
following  facts  and  be  in  form  substantially  as  follows : 

•  •  •  • »  19 

To  the  Secretary  of  State,  Lansing,  Michigan: 

,  a  foreign  corporation  organized  and  existing  un- 
der and  by  virtue  of  the  laws  of  the  State  of ,  hereby 

makes  the  following  declaration,  pursuant  to  an  act  of  the  legislature  of 
Michigan,  entitled  "  An  act  to  prescribe  the  terms  and  conditions  on  which 
foreign  corporations  may  be  admitted  to  do  business  in  Michigan,"  ap- 
proved June  6,  1901,  as  amended : 

I.  The  location  of  its  principal  business  is 

The  location  of  its  principal  place  or  places  of  business 

The  names  and  addresses  of  the  principal  officers  are 

246 


Questions  and  Answers  in  Commercial  Law, 


2.  The  location  of  its  principal  office  and  the  principal  place  of  busi- 
ness in  Michigan  

The  names  and  addresses  of  the  officers  or  agents  of  the  company  in 
charge  of  its  business  in  Michigan  are 

3.  The  authorized  capital  stock  of  said  corporation  is  

dollars  ($ )• 

4.  The  total  value  of  the  property  owned  and  used  by  the  company 
in  its  business,  giving  the  location  and  general  character,  and  stating 
separately  the  value  of  its  tangible  property,  of  its  cash  and  credits,  its 
franchises,  patents,  trade  marks,  formulas,  good  will,  is •- 

5.  The  value  of  property  owned  and  used  in  Michigan  and  where  sit- 
uated, showing  different  kinds,  as  in  item  four 

6.  The   total   amount   of   business   transacted   during  the   preceding 


year. 


7.  The  amount  of  business,  if  any,  transacted  in  Michigan 

8.  The  particular  purpose  or  particular  kind  of  business  for  which  the 
company  desires  to  be  admitted  is  the  following 

9.  Its  corporate  term  will  expire 

In  witness  whereof,  said has  caused  its  corporate  seal 

to  be  affixed  and  its  name  to  be  hereunto  attached  this day  of 

,  A.  U.  19 


(l.  s.) 

State  of ,  County  of ,  ss. 

,  being  duly  sworn,  depose  and  say,  that  they 

are  officers,  to  wit,  the and respectively,  of 

;  that  the  foregoing  statement,  executed  in  the  name 

and  on  behalf  of  said  corporation,  and  under  its  corporate  seal,  is  true. 


Sworn  to  before  me  and  subscribed  in  my  presence,  this, 
day  of ,  A.  D.  19 

My  commission  expires ,  19 


Office  of  the  Secretary  of  State. 

Lansing,  Michigan,  ,  19 

From  the  foregoing  statement  made  by  the  said ,  and 

from  other  facts  coming  to  my  knowledge,  I  find  the  proportion  of  the 
capital  stock  of  the  company  represented  by  its  property  and  business  in 

Michigan  to  be per  cent,  of  its  authorized  capital  stock,  to 

wit,  the  sum  of dollars,  on  which  the  franchise  fee  of  one- 
half  of  one  mill  on  each  dollar  will  be  the  sum  of dollars. 


Deputy  Secretary  of  State. 


f 


it  I 


Hi 


AccifUMtancy  Problems  and  Solutiom, 

(b)  Foreigii  companies  are  required  to  pay  to  the  Secretary  of  State  a 
franchise  fee  of  one-half  a  mill  (.0005)  on  each  dollar  of  the  proportion 
of  their  authorized  capital  stock  represented  by  the  property  owned  and 
used  and  business  transacted  in  Michigan.  In  case  such  corporations  are 
not  at  the  time  of  admission  carrying  on  any  business  outside  of  Michi- 
gan, they  are  required  to  pay  a  franchise  fee  on  their  entire  authorized 
capital  stock.    The  minimum  fee  is  twenty-five  ($2500)  dollars. 

The  fees  payable  to  the  Secretary  of  State,  in  addition  to  the  franchise 
fee,  are  as  follows: 
For  recording  articles  of  incorporation,  twenty  cents  per  folio. 
For  filing  same,  one  dollar. 
For  issuing  certificate  of  authority,  twenty-five  cents. 

(c)  Corporations  may  be  formed  under  general  laws,  but  shall  not  be 
created,  nor  shall  any  rights,  privileges  or  franchises  be  conferred  upon 
them  by  special  act  of  the  legislature.  Section  9  of  Act  No.  232,  Public 
Acts  of  1903,  provides: 

"Before  any  corporation  organized  under  this  act  to  operate  in  this 
State  shall  commence  business,  the  president  shall  cause  the  articles  of 
association  to  be  recorded,  at  the  expense  of  said  corporation,  in  the  of- 
fice of  the  Secretary  of  State  of  this  state,  and  in  the  office  of  the  count)' 
clerk  of  the  county  in  which  such  operations  are  to  be  carried  on,  and  be- 
fore any  corporation  organized  hereunder,  to  operate  outside  this  state, 
shall  commence  business,  the  president  shall  cause  the  articles  of  associa- 
tion to  be  recorded,  at  the  expense  of  the  corporation,  in  the  office  of  the 
Secretary  ol  State  and  in  the  office  of  the  county  clerk  of  the  county  in 
this  state  where  the  office  of  the  corporation  is  located.  The  Secretary 
of  State  and  the  county  clerk  in  whose  office  such  articles  of  association 
shall  be  recorded,  shall  each  certify  upon  every  such  articles  of  associa- 
tion recorded  by  him,  the  time  when  it  was  received,  with  a  reference  to 
the  book  and  page  where  the  same  is  recorded,  and  the  record,  or  tran- 
script of  the  record,  certified  by  the  Secretary  of  State  of  this  State,  and 
tinder  the  seal  thereof,  shall  be  received  in  all  the  courts  of  this  State  as 
^*fiMi  facie  evidence  of  the  due  formation,  existence  and  capacity  of  such 
corporation  in  any  suit  or  proceedings  brought  by  or  against  the  same. 
And  in  case  of  companies  organized  under  Act  Number  Forty-one,  laws  of 
eighteen  hundred  and  fifty-three  and  amendments  thereto,  and  whose 
original  articles  of  association  and  amendments  are  filed  in  the  office  of 
the  Secretary  of  State,  copies  of  such  articles  of  association  or  amend- 
ments, duly  authenticated  by  the  Secretary  of  State  under  the  seal  of  the 
State,  shall  be  received  in  all  courts  of  this  State  as  ^ma  facie  evidence 
of  the  thingi  therein  stated."  The  following  is  a  blank  form  of  articles 
of  association: 


it 


AITICLIS  OF  ASSOaATION   OF. • 


"We,  the  undersigned,  desiring  to  become  incorporated  under  the  pro- 
visions of  Act  No.  232,  of  the  Public  Acts  of  1903,  entitled  *  An  act  to  re- 
vise and  consolidate  the  laws  providing  for  the  incorporation  of  manu- 

248 

f 


Questions  and  Answers  in  Commercial  Laiv. 

facturing  and  mercantile  companies,  or  any  union  of  the  two.  and  for  the 
incorporation  of  companies  for  carrying  on  any  other  lawful  business, 
except  such  as  are  precluded  from  organization  under  this  act  by  its  ex- 
press provisions,  and  to  prescribe  the  powers  and  to  fix  the  duties  and 
liabilities  of  such  corporations,'  and  the  acts  amendatory  thereof  and  sup- 
plementary thereto,  do  hereby  make,  execute  and  adopt  the  following 
articles  of  association,  to  wit : 

1.  The  name  assumed  by  this  association,  and  by  which  it  shall  be 
known  in  law,  is 

2.  The    purpose    or    purposes    of    this    corporation    are    as    fol- 
lows : 

3.  The  principal  place  at  which  operations  are  to  be  conducted  is  at 
,  in  the  county  of ,  State  of 

4.  The  capital  stock  of  the  corporation  hereby  organized  is  the  sum 
of dollars. 

5.  The  number  of  shares  into  which  the  capital  stock  is  divided  is 
,  of  the  par  value  of dollars  each. 

6.  The  amount  of  capital  stock  subscribed  is  the  sum  of 

dollars. 

7.  The  amount  of  said  stock  actually  paid  in  at  the  date  hereof  is  the 

sum  of dollars,  of  which  amount dollars 

has  been  paid  in  cash,  and dollars  has  been  paid  in  other 

property,  an  itemized  statement  of  which,  with  the  valuation  at  which 
each  item  is  taken,  is  as  follows,  viz : 

8.  The  office  in  the  State  of  Michigan  for  the  transaction  of  business 
shall  be  kept  at 

9.  The  term  of  existence  of  this  corporation  is  fixed  at 

years  from  the  date  hereof. 

10.  The  names  of  the  stockholders,  their  respective  residences  and 
the  number  of  shares  of  stock  subscribed  for  by  each  are  as  follows : 

Names.  Residences.  No.  of  Shares. 


In  witness  whereof,  we,  the  parties  hereby  associating  for  the  pur- 
pose of  giving  legal  effect  to  these  articles,  hereunto  sign  our  names,  this 
•  • day  of ,  A.  D.  19 

Names.  Names. 


ss. 


State  of  Michigan,  County  of , 

^"^  ^^^^ <Jay  of ,  19  .   .,  before  me.  a 

»n  and  for  said  county,  personally  appeared 

known  to  me  to  be  the  persons  named  in,  and  who  executed  the  foregoing 


^^tif 


III 


I I 

'I 


iliilliii 
P 


Accountancy  Problems  and  Solutions, 

instriimeiit,  and  severally  acknowledged  that  they  executed  the  same  freely 

and  for  the  intents  and  purposes  therein  mentioned. 


My  coOTimission  expires ,  19, . . . 

State  of  Michigan,  County  of . .,  ss. 

and. ,  being  duly  sworn,  do  depose 

and  say  that  they  are  three  of  the  organizers  of  the. Com- 
pany, whose  articles  of  association  are  hereto  attached  j  that  they  know 
the  property  described  in  Art.  7  of  such  articles  of  association  and  taken 
in  payment  for  capital  stock,  and  that  the  same  has  been  actually  trans- 
ferred to  such  corporation,  and  further  say  that  said  property  is  of  the 
actual  value  of dollars.    And  further  say  not 


day  of... 


Subscribed  and  sworn  to  before  me  this.. . 

A.  Jj,  i'9 

My  commission  expires. 


(d)  Three  or  more  incorporators  may  form  a  corporation  in  Michigan. 

(e)  The  minimum  is  $1,000  and  the  maximum  is  $25,ooo,ooa  (Act.  No. 
^32,  Public  Acts  1903,  Sec.  2,  par.  4.) 

(f)  Dissolution  may  be  effected  only  by  application  to  the  courts. 
(f)  Corporate  charters  may  be  dissolved  for  entering  illegal  combines 

or  trusts,  for  attempting  to  act  as  a  corporation  when  not  legally  or- 
ganized and  for  mis-user  or  non-user  of  corporate  powers.  (Compiled 
Laws,  1897,  Sees.  8618,  8657,  93S4m.) 

21.  Name  two  circumstances  under  which  a  director  of  a  corpora- 
tion organized  in  Maryland  under  the  general  corporation  law  of  the 
State  would  be  held  personally  liable  for  debts  of  a  corporation.    To  what 

extent  would  he  be  liable? 

Answer,  Chapter  240  of  the  Laws  of  1908,  Section  50,  of  the  Laws  of 
Maryland,  provides: 

"If  the  trustees,  managers  or  directors  of  any  such  corporation  shall 
declare  and  pay  any  dividend  when  the  corporation  is  insolvent,  or  any 
dividend  the  payment  of  which  would  render  it  insolvent,  or  would  di- 
ininish  the  amount  of  the  capital  stock,  they  shall  be  jointly  and  severally 
liable  to  the  extent  of  the  dividends  so  declared  and  paid  for  all  the  debts 
of  the  corporation  then  existing,  and  also  for  all  that  shall  thereafter  be 
contracted,  while  they  shall  respectively  continue  in  office,  even  although 
the  whole  amount  of  the  capital  of  said  corporation  has  been  paid  in. 

"No  loin  of  money  shall  be  made  by  any  corporation  to  any  stock- 
holders or  directors  therein,  and  if  any  such  loan  shall  be  made,  the  officer 

250 


Questions  and  Answers  in  Commercial  Law, 

or  officers  or  directors  who  shall  make  it  or  assent  thereto  shall  be  jointly 
and  severally  liable  for  all  the  debts  of  said  corporation  to  the  extent  of 
the  loss  that  may  result  from  such  loan;  but  this  does  not  apply  to  any 
building  or  homestead  association,  or  any  corportion  whose  principal 
business  under  its  charter  is  to  loan  money  on  real  or  personal  property, 
or  to  any  corporation  receiving  and  authorized  to  receive  money  on  de- 
posit, or  to  any  life  insurance  company  lending  money  to  any  of  its  policy- 
holders or  their  policies." 

22.  A  corporation  that  had  two  issues  of  bonds  outstanding  namely, 
first  mortgage  bonds  dated  1890,  and  second  mortgage  bonds  dated  1900, 
acquired  the  property  of  a  competitive  corporation  subject  to  its  first 
mortgage  bonds  dated  1902.  The  first  corporation  thereafter  issued  con- 
solidated mortgage  bonds  dated  1906,  covering  all  its  properties,  and 
retired  its  first  mortgage  bonds  dated  1890.  State  the  order  of  precedence 
of  the  three  outstanding  mortgages  in  case  of  Uquidation,  giving  the 
position  of  each  property  as  regards  the  several  outstanding  mortgages. 

Answer.  The  holders  of  the  bonds  of  1902  have  a  priority  of  claim  in 
the  property  of  the  competitive  corporation.  After  they  have  been  paid 
out  of  the  property  of  that  corporation  the  holders  of  the  consolidated 
mortgage  bonds  of  1906  are  entitled  to  pa3rment  from  that  property. 
Although  the  question  does  not  state  definitely  the  terms  of  the  mortgage 
of  1906,  it  is  inferred  that  it  was  a  refunding  mortgage  to  a  certain  extent 
and  that  the  bonds  dated  1890  were  retired  by  exchange  for  the  bonds  of 
1906,  or  the  proceeds  of  those  bonds,  and  in  that  event,  the  bonds  of  1906 
have  a  prior  claim  to  the  other  property  equal  to  the  claim  of  the  first 
bonds  of  1890.  The  holders  of  the  second  mortgage  bonds  dated  1900, 
therefore,  have  a  second  claim  on  the  property  of  the  original  corporation 
only.  Seymour  Thompson  in  the  second  edition  of  his  authoritative  work 
on  corporations  at  Section  2263,  says :  "  Where,  under  authority  for 
refunding,  old  bonds  are  exchanged  for  new  ones,  and  where,  in  the  mean- 
time, a  second  mortgage  has  been  placed  on  the  property,  in  such  a  case 
the  new  bonds  exchanged  for  the  old  ones  will  be  advanced  to  the  security 
of  the  original  mortgage,  and  will  be  entitled  to  priority  over  the  second 
mortgage."  (See  also  U.  S.  Rubber  Co.,  vs.  American,  etc.,  Co.  181 
U.  S.  434.) 

23.  When  persons  associate  themselves  together  as  a  corporation 
and  the  incorporation  is  defective  or  incomplete,  what  is  their  position  as 
against  the  creditors  of  the  corporation? 

Answer.  The  liability  of  members  of  a  defective  corporation  will  not 
differ  from  that  of  members  of  a  complete  corporation  if  the  elements 
of  a  "  de  facto  "  corporation  are  present.    These  elements  are : 

1.  A  general  law  under  which  the  corporation  could  be  legally  formed. 

2.  A  bona  Me  attempt  to  comply  with  the  provisions  of  that  law. 

3.  User  of  corporate  powers. 

251 


I 


Accountancy  Problems  and  Solutions. 

If  any  of  these  elements  are  not  present  the  members  will  be  liable  as 
partiitrs.    In  some  states  the  doctrine  of  "'  dt  facto  "  corporations  is  not 

recognized.    (See  <itiestion  No..  17.) 

24.  Describe  the  following  stocks  and  securities  issued  by  corpora- 
tions; state  the  assets  securing  them  and  their  order  of  preference  in  the 
liquidation  of  a  corporation:  (a)  preferred  stock,  (b)  collateral  trust 
bonds,  (c)  iirst  mortgage  bonds,  (d)  coupon  notes,  (e)  consolidated  mort- 
gage bonds. 

Answer,  (a)  The  following  definition  and  description  of  preferred 
stock  is  taken  from  Professor  William  H.  Lough's  "Corporation 
Finance  "' : 

*Mn  most  corporations  all  the  stock  is  of  one  class  and  each  share  has 
an  equal  right  to  its  proportion  of  the  assets  and  earnings.  Such  stock  is 
called  *  common  *  because  no  share  has  any  privileges  which  do  not  attach 
to  all  the  other  shares.  In  general,  common  stock  may  be  defined  as 
stock  which  does  not  possess  any  special  or  peculiar  rights. 

Other  corporations,  howe¥er,  set  aside  certain  amounts  of  stock  in  a 
separate  class  and  grant  to  this  class  specific  privileges.  Such  stock  is 
called  preferred  The  usual  preference  consists  in  giving  a  fixed  dividend 
to  the  stock  preferred  before  any  iiaynient  whatever  is  made  to  the  com- 
mon stock.  This  dividend  may  be  '  cumulative  * ;  that  is,  if  profits  are  not 
enough  to  pay  it  in  full  in  one  or  more  years,  the  unpaid  portion  remains 
as  a  claim  against  earnings  that  must  be  settled  before  any  payment  is 
made  to  the  common  stock.  Or  it  may  be  'non-cumulative';  that  is,  if 
profits  of  preceding  years  are  insufficient  to  cover  the  preferred  stock 
dividend,  the  unpaid  portion  is  wholly  lost  to  the  preferred  stockholders, 
no  matter  how  large  the  earnings  in  succeeding  years  may  be.  Let  it  be 
kept  clearly  in  mind,  however,  that  preference  as  to  dividends  is  merely 
the  usual,  not  the  universal,  privilege  given  to  preferred  stock.  When 
the  single  statement  that  stock  is  'preferred'  is  made,  it  is  necessary  to 
consult  the  charter  and  by-laws  of  the  corporation  in  order  to  be  sure  as  to 
the  exact  nature  of  the  preference. 

The  stock  may  be  preferred  as  to  assets,  as  well  as  to  dividends,  or  as 
to  both,  Futhermore,  cumulative  preferred  stock  may  get  a  fixed  dividend, 
and  no  more,  which  is  the  customary  arrangement;  it  may  get  a  fixed 
dividend  and  then,  after  the  common  stock  has  secured  a  fixed  dividend, 
all  the  rest  of  the  earnings  may  be  divided  equally  between  the  two  stocks, 
which  the  arrangement  presumed  by  law,  unless  an  expressed  stipulation 
to  the  contrary  is  contained  in  either  the  charter  or  by-laws;  or  it  may 
get  a  fixed  dividend  and  the  common  stock  a  fixed  dividend,  and  all  the 
rest  of  the  earnings  may  then  go  to  the  preferred  stock,  which  is  a  very 
unusual  arrangement." 

(b)  The  folbwing  definition  and  description  of  collateral  trust  bonds  is 
also  taken  from  Professor  Lough's,  "Corporation  Finance": 

**With  the  growth  of  large  holding  companies  a  modified  form  of 
mortgage  bond  has  come  to  be   widely  used.    It  is  called  a  'collateral 


Questions  and  Answers  in  Commercial  Law. 


trust'  bond  because  it  is  based  on  the  securities  of  other  companies  owned 
by  the  bond-issuing  corporation  and  deposited  with  a  trustee  as  collateral 
security  for  the  bondholders.  The  securities  are  covered  by  a  deed  of 
trust  just  as  in  the  case  of  real  property  offered  as  security.  The  securi- 
ties may  consist  either  of  stocks  or  of  bonds  of  subsidiary  companies  or 
of  a  combination  of  both. 

It  would  seem  at  first  sight  that  a  coUaternal  trust  bond  would  not  be 
worth  much,  especially  when  the  collateral  consists  of  stock.  In  such  a  case 
the  collateral  trust  bond  would  be  junior  by  several  degrees  to  all  underly- 
ing bonds  of  the  subsidiary  companies.  In  case  any  of  the  subsidiary  com- 
panies go  into  bankruptcy  and  force  the  holding  company  to  default,  all 
that  the  trustee  for  the  collateral  trust  bondholders  can  do  is  to  take  the 
stock  posted  as  collateral.  When  he  gets  the  stock  he  still  is  a  long 
distance  from  having  tangible  property  with  which  to  satisfy  the  demands 
of  the  bondholders.  Even  when  the  collateral  consists  of  bonds  they  are 
usually  junior  issues,  and  the  collateral  trust  bondholders  in  case  of 
default  are  very  uncertain  as  to  getting  possession  of  real  property." 

(c)  First  mortgage  bonds  are  those  secured  by  a  first  mortgage  on  any 
given  tangible  property  of  a  corporation.  The  mortgage  is  usually  made 
out  to  a  trustee  or  trustees  who  holds  the  mortgage  deed  of  trust  for  the 
benefit  of  all  the  holders  of  bonds  of  the  same  series, 

(d)  The  term  "  coupon  notes  "  as  used  in  this  question  probably  refers 
to  short  time  notes  the  interest  on  which  is  evidenced  by  coupons  attached 
to  the  note. 

(3)  The  term  "consolidated"  as  applied  to  mortgage  bonds  usually 
indicates  that  they  are  underlying  mortgages  on  specific  parcels  of  property, 
which  mortgages  are  usually  to  be  taken  up  by  an  exchange  of  the  bonds 
in  the  consolidated  securities  for  the  bonds  secured  by  the  underlying 
mortgage.  Reference  in  every  case  should  be  made  to  the  terms  of  the 
mortgage,  for  the  consolidated  mortgage  bonds  of  one  company  may  be 
so  worded  as  to  be  so  diflferent  in  their  nature  and  their  rights  to  priority 
from  the  consolidated  mortgage  bonds  of  another  company.  It  was  held 
in  the  case  of  Caylus  vs.  N.  Y.  K.  &  S.  R.  C,  10  Hun.  295,  that  the  word 
"  consolidated  "  in  a  bond  is  sufficient  to  put  the  holder  on  inquiry  as  to 
what  the  real  nature  of  the  bonds  are. 

Upon  liquidation  of  a  corporation,  the  holders  of  the  first  mortgage 
bonds  have  the  first  preference.  The  holders  of  consolidated  mortgage  bonds 
are  usually  given  whatever  preference  the  bondholders  had  whose  bonds 
have  been  taken  up  in  exchange  for  the  consolidated  mortgage  bonds. 
The  holders  of  collateral  trust  bonds  have  a  first  lien  on  the  collateral  by 
which  they  are  secured.  The  holders  of  coupon  notes  are  in  the  position 
of  unsecured  creditors  and  have  no  lien  upon  the  assets  of  the  corporation. 
If  the  preferred  stock  is  preferred  as  to  assets,  after  all  debts  have  been 
paid,  they  receive  their  share  of  the  assets  up  to  the  par  value  of  their 
stock  before  the  common  stock  is  entitled  to  participate.  (See  answer  to 
question  22). 


253 


Accounimcy  Problems  and  Solutiofis, 

25.    State  the  procedure  in  New  York  State  by  which  pubUc  service 
corporations  may  issue  bonds. 

Answer,    The  Stock  Corporation  Law  of  New  York,  Section  6,  pro- 
vides in  part  as  follows : 

•*  In  addition  to  the  powers  conferred  by  the  general  corporation  law, 
every  stock  corporation  shall  have  the  power  to  borrow  money  and  con- 
tract debts,  when  necessary  for  the  transaction  of  its  business,  or  for  the 
exercise  of  its  corporate  rights,  privileges  or  franchises,  or  for  any  other 
lawful  purpose  of  its  incorporation;  and  it  may  issue  and  dispose  of  its 
obligations  for  any  amount  so  borrowed,  and  may  mortgage  its  property 
and  franchises  to  seaire  the  payment  of  such  obligations,  or  of  any  debt 
contracted  for  said  purposes.  Every  such  mortgage,  except  purchase- 
money  mortgages  and  mortgages  authorized  by  contracts  made  prior  to 
May  first,  eighteen  hundred  and  ninety-one,  shall  be  consented  to  by  the 
holders  of  not  less  than  two-thirds  of  the  capital  stock  of  the  corporation, 
which  consent  shall  be  given  either  in  writing  or  by  vote,  at  a  special 
meeting  of  the  stockholders  called  for  that  purpose,  upon  the  same  notice 
as  that  required  for  the  annual  meetings  of  the  corporation,  and  a  certifi- 
cate under  the  seal  of  the  corporation  that  such  consent  was  given  by  the 
stockholders  in  writing,  or  that  it  was  given  by  a  vote  at  a  meeting  as 
ifbresaid,  shall  be  subscribed  and  acknowledged  by  the  president  or  a  vice- 
president,  and  by  the  secretary  or  an  assistant  secretary,  of  the  corporation, 
and  shall  be  filed  and  recorded  in  the  office  of  the  clerk  or  register  of  the 
county  wherein  the  corporation  has  its  principal  place  of  business." 

The  issuing  of  bonds  by  certain  kinds  of  public  service  corporations  is 
governed  by  the  Public  Service  Law  (Sections  55  and  69).  Thus,  railroad, 
gas  and  electrical  corporations  proposing  to  issue  bonds,  notes  or  other 
evidences  of  indebtedness  payable  at  periods  of  more  than  twelve  months 
after  date  thereof  must  first  obtain  from  the  Public  Service  Commission 
an  order  tnthorizing  such  issue.  Telephone,  telegraph,  navigation,  ferry, 
stage  coach,  tramway,  pipe  line  and  water  works  corporations  are  not 
subject  to  the  provisions  of  the  Public  Service  Law. 

26.  The  president  of  a  company  holds  office  for  five  years  and  renders 
considerable  active  service  without  asking  for  or  receiving  com- 
pensation. A  new  management  takes  possession  of  the  affairs  of  the  com- 
pany and  elects  a  new  president  The  former  president  claims  that  he 
is  entitled  to  an  allowance  for  salary.  Would  an  action  for  compensation 
for  the  services  be  sustained?    Give  reasons. 

AuMmr,  The  president  of  a  corporation  is  not  entitled  to  compensa- 
tion unless: 

a.  There  was  a  valid  antecedent  agreement  contained  in  the  by-laws 
or  otherwise. 

k  A  contract  to  which  his  own  vote  was  not  essential  so  provided. 

c.  The  services  rendered  were  clearly  outside  the  scope  of  his  official 
duties* 

3S4' 


Questions  and  Answers  in  Commercial  Law. 

27.  Define  a  corporation.  Who  may  dissolve  it  and  under  what 
conditions? 

Answer.  (See  questions  i  and  19.  In  the  answer  to  question  19  the 
two  methods  of  voluntary  dissolution  were  considered.)  Section  102  of 
the  (General  Corporation  Law  provides  for  the  involuntary  dissolution  of 
corporations  as  follows : 

"  In  either  of  the  following  cases,  an  action  to  procure  a  judgment,  dis- 
solving a  corportion,  created  by  or  under  the  laws  of  the  State,  and  for- 
feiting its  corporate  rights,  privileges  and  franchises,  may  be  mamtamed, 
as  prescribed  in  the  next  section : 

1.  Where  the  corporation  has  remained  insolvent  for  at  least  one 

year. 

2.  Where  it  has  neglected  or  refused,  for  at  least  one  year,  to  pay 
and  discharge  its  notes  or  other  evidences  of  debt. 

3.  Where  it  has  suspended  its  ordinary  and  lawful  business  for  at 

least  one  year. 

4.  If  it  has  banking  powers,  or  power  to  make  loans  on  pledges  or 
deposits,  or  to  make  insurances,  where  it  becomes  insolvent  or  unable  to 
pay  its  debts,  or  has  violated  any  provision  of  the  act,  by  or  under  which 
it  was  incorporated  or  of  any  other  act  binding  upon  it. 

An  action  specified  in  the  last  section  may  be  maintained  by  the  attor- 
ney-general in  the  name  and  in  behalf  of  the  people.  And  whenever  a 
creditor  or  stockholder  of  any  corporation  submits  to  the  attorney-general 
a  written  statement  of  facts,  verified  by  oath,  showing  grounds  for  an 
action  under  the  provisions  of  the  last  section,  and  the  attorney-general 
omits,  for  sixty  days  after  this  submission,  to  commence  an  action  speci- 
fied in  the  last  section,  then,  and  not  otherwise,  such  creditor  or  stock- 
holder may  apply  to  the  proper  court  for  leave  to  commence  such  an 
action,  and  on  obtaining  leave  may  maintain  the  same  accordingly." 

28.  If  the  stock  of  a  company  is  transferred  before  it  is  fully  paid 
for,  will  the  original  stockholder  be  liable  for  the  unpaid  balance?  Ex- 
plain fully. 

Answer.  Sections  56  and  59  of  the  Stock  Corportion  Law  provide  for 
the  liability  of  stockholders.  A  holder  of  stock  is  personally  liable  to 
creditors  of  the  corporation  to  an  amount  equal  to  the  amount  unpaid  on 
his  stock  for  debts  of  the  corporation  contracted  while  such  stock  was 
held  by  him.  Such  liability  cannot  be  enforced  until  judgment  for  the 
debt  has  been  recovered  against  the  corporation,  and  execution  has  been 
returned  unsatisfied  in  whole  or  in  part,  and  the  amount  due  on  such  exe- 
cution is  the  amount  recoverable  with  costs  against  the  stockholder. 
Stockholders  are  not  personally  liable  for  any  debt  of  the  corporation  not 
payable  within  two  years  of  the  time  it  is  contracted,  nor  unless  an  action 
for  its  collection  shall  be  brought  against  the  corporation  within  two 
years  after  the  debt  becomes  due.  No  action  shall  be  brought  against  the 
stockholder  after  two  years  from  the  time  he  ceased  to  be  a  stockholder. 
Stockholders  may  be  held  personally  liable  for  debts  owing  to  laborers, 

255 


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icemmtancy  Problems  and  Solutions, 


Questions  and  Answers  in  Commercial  Law. 


lit 


II 


4 

i 


senrants  and  employees  of  the  corporation  if  served  with  written  notice 

by  such  person  within  thirty  days  after  they  have  ceased  serving  the  cor- 

■poration. 

'3^  (a)  In  what  proportion  to  the  actual  paid-up  capital  of  a  Michigan 
corporation  may  preferred  stock  be  issued  ?  (b)  What  must  be  expressed 
on  the  face  of  preferred  stock  certificates  as  regards  their  redemption,  etc.  ? 
(c)  When  cumulative  dividends  are  permitted,  what  is  the  maximum  rate 
per  cent  per  annum?  (d)  Does  the  preferred  stock  vote  the  same  as  the 
common  stock?  (e)  Under  what  conditions  would  preferred  stock  have 
equal  rights  with  the  common  stock  in  the  control  of  a  corporation? 
(f)  Is  the  transfer  upon  the  books  of  a  corporation  necessary  to  complete 
the  assignee's  ownership  of  a  stock  certificate?    Explain  fully. 

Answer,  (a)  The  preferred  stock  of  a  Michigan  corporation  shall  at 
no  time  exceed  two-thirds  of  the  actual  paid-in  capital.  (Act  No.  232, 
Public  Acts  1903,  Sec.  35.) 

(b)  Section  35  o^  Act  No.  232,  PubHc  Acts  1903,  provides : 
**Any  such  company  shall  have  power  to  create  and  issue  certificates 
for  two  kinds  of  stock,  vii.:  General  or  common  stock,  and  preferred 
stock,  which  preferred  stock  shall  at  no  time  exceed  two-thirds  of  the 
actual  capital  paid  in.  and  shall  be  subject  to  redemption  at  par  at  a  cer- 
tain time  to  be  fixed  by  the  by-laws  of  said  corporation,  and  to  be  ex- 
pressed in  the  certificates  therefor.  And  the  holder  of  such  preferred 
stock  shall  be  entitled  to  a  fixed  dividend,  payable  quarterly,  half-yearly 
or  yearly,  which  said  dividend  shall  be  cumulative,  payable  at  the  time 
eaq)rcssed  in  said  certificate,  not  to  exceed  eight  per  cent,  per  annum,  be- 
fore any  dividend  shall  be  set  apart  or  paid  on  the  common  stock.  In  no 
event  shall  the  holder  of  such  preferred  stock  be  individually  or  per- 
sonally liable  for  the  debts  or  other  liabilities  of  said  corporation,  except- 
ing debts  for  labor.  Said  corporation  shall  be  controlled  by  a  board  of 
directors  elected  by  the  preferred  and  common  stockholders,  excepting 
when  otherwise  provided  in  the  articles  of  association  or  amendments 
thereto;  provided  always,  if  at  any  time  upon  a  fair  valuation  of  the 
assets  of  the  corporation  the  common  stock  shall  be  impaired  in  an  amount 
equal  to  ten  per  cent  thereof  or  any  dividend  due  on  the  preferred  stock 
shall  remain  unpaid  for  sixty  days,  the  holders  of  the  preferred  stock 
shall  have  an  equal  right  with  the  common  stock,  share  and  share  alike, 
to  participate  in  the  election  of  directors  and  control  of  said  corporation. 
If  for  any  reason  said  corporation  shall  cease  business  or  become  insol- 
vent then  after  the  payment  of  all  liabilities  and  debts  the  remainder  of 
the  assets  of  said  corporation  shall  be  applied  first  in  payment  in  full  of 
all  preferred  stock  and  then  unpaid  dividends  due  thereon,  and  the  bal- 
ance divided  pro  rata,  share  and  share  alike,  among  the  holders  of  the 
common  stock.  Every  corporation  organized  or  existing  under  the  pro- 
visions of  this  act  may  by  a  vote  of  three-fourths  in  interest  of  its  cap- 
ital stock  amend  its  articles  of  association  providing  for  the  issue  of  pre- 
ferred and  common  stock,  in  accordance  with  this  section,  in  the  same 

256 


manner  and  with  the  same  effect  as  is  now  provided  by  Section  17  of  this 
act  relating  to  amending  articles  of  association." 

(c)  See  answer  to  (b)  above. 

(d)  See  answer  to  (b)  above. 

(e)  See  answer  to  (b)  above. 

(f)  The  assignee's  title  and  rights  become  complete  upon  delivery  of 
the  certificate  with  a  proper  endorsement  of  assignment  thereon.  (Mc- 
Lean vs.  Medicine  Co.,  96  Mich.  479.) 

30.  In  respect  to  Illinois  Corporation  Law:  (a)  How  many  in- 
corporators are  required?  If  any  exceptions,  name  them,  (b)  What  is 
the  limit  of  time  for  which  incorporations  can  be  had?  (c)  How  soon 
after  incorporation  must  a  corporation  organize  and  begin  business? 

Answer,  (a)  Any  number  of  persons,  not  less  than  three  nor  more 
than  seven  may  form  a  corporation  in  Illinois. 

(b)  The  duration  of  a  corporation  may  be  for  any  period  not  longer 
than  ninety-nine  years,  as  the  statement  or  application  may  provide.  (Gen- 
eral Corporation  Laws,  Sec.  2.) 

(c)  Upon  the  recording  of  the  certification  of  complete  organization  of 
the  corporation,  the  corporation  shall  be  deemed  fully  organized  and  may 
proceed  to  business.  Unless  such  company  shall  be  organized  and  shall 
proceed  to  business  as  provided  in  this  act,  within  two  years  after  the 
date  of  such  license,  then  such  license  shall  be  deemed  revoked  and  all 
proceedings  thereunder  void.     (General  Corporation  Laws,  Sec.  4.) 

31.  Can  a  corporation  legally  purchase  or  otherwise  become  pos- 
sessed of  its  own  capital  stock?  Do  the  admissions  of  a  stockholder  or  a 
director  legally  bind  a  corporation?  Under  what  authority  can  a  cor- 
poration issue  a  mortgage  upon  its  own  property? 

(a)  There  is  no  staturory  provision  authorizing  a  corporation  to  pur- 
chase its  own  shares.  The  courts  of  the  various  jurisdictions  in  America 
are  not  agreed  on  this  point,  but  the  weight  of  authority  holds  that  a 
corporation  may  without  express  statutory  authority  purchase  its  own 
shares,  provided  the  purchase  is  entered  into  bona  fide  and  does  not  en- 
danger the  claims  of  creditors.  (Chicago,  etc.,  R.  R.  Co.  vs.  Marseilles, 
84  111.  145.) 

(b)  No.  If  a  director  acting  within  the  scope  of  his  duties  as  director, 
however,  makes  an  admission,  it  will  bind  the  company. 

(c)  There  is  no  provision  in  the  statutes  of  Illinois  respecting  the  au- 
thority for  executing  a  corporate  mortgage.  The  directors,  therefore, 
have  that  authority. 

32.  On  whom  does  loss  legally  rest  in  case  of  a  forged  certificate  of 
the  capital  stock  of  a  corporation? 

Answer.  This  question  probably  refers  to  over-issued  and  spurious 
stock  which  is  void.  The  holder  may  Sue  the  corporation  and  the  officers 
who  were  interested  in  the  issue  of  the  said  stock  for  damages,  and  may 

257 


I 


11 


i< 


Accountancy  Problems  end  Solutions, 

iotn  tliem  in  one  action  or  sue  them  separately.  If  the  stock  is  purchased 
from  an  officer  who  appears  to  be  interested  in  the  transaction,  the  re- 
ceiver of  the  stock  will  be  bound  to  inquire  into  the  authority  of  the  offi- 
cer for  issuing  the  stock.  The  person  damaged  will  have  to  prove,  of 
course,  that  he  had  no  notice  of  the  fraud  involved  in  the  transaction.  In 
the  absence  of  fraud,  the  vendor  of  a  forged  certificate  cannot  be  held  by 
the  vendee.    (See  Cook  on  Corporations,  Sections  291-8) 

33.  What  is  a  joint  stock  company?  In  what  ways  can  it  be  com- 
pared with  (a)  a  partnership,  (b)  an  incorporated  company? 

Answer,  The  Cyclopedia  of  Law  and  Procedure  defines  a  joint  stock 
company  as  follows :  "  A  joint  stock  company  is  an  association  of  indi- 
viduals for  purposes  of  profit,  possessing  a  common  capital  contributed 
by  the  members  composing  it,  such  capital  being  commonly  divided  into 
the  shares,  of  which  each  member  possesses  one  or  more,  and  which  are 
transferable  by  the  owner."  (For  a  history  of  joint  stock  companies,  see 
5  Albany  Law  Journal  19.) 

The  distinction  between  a  joint  stock  company  and  a  partnership,  and 
between  a  joint  stock  company  and  an  incorporated  company,  is  indicated 
in  answer  to  question  11. 

34.  Define  treasury  stock.  What  effect  has  the  term  "fully  paid 
and  non-assessable,"  written  upon  a  stock  certificate,  in  respect  to  the 
liability  of  stockholders  to  creditors  of  the  company?    Explain. 

Answer,  Treasury  stock  is  sometimes  used  to  indicate  stock  which  has 
not  been  issued,  but  the  weight  of  authority  is  to  the  effect  that  treasury 
stock  is  stock  which  has  been  issued  and  finds  its  way  back  to  the  treasury 
of  the  company  through  purchase,  gift,  forfeiture  or  otherwise. 

For  the  answer  to  the  second  part  of  this  question,  see  answer  to  ques- 
tion 7, 

35.  What  is  corporate  stock,  and  how  does  it  differ  from  bonds 
issued  by  a  corporation? 

Answer.  By  corporate  stock  is  meant  the  undivided  shares  of  interest 
which  the  stockholders  have  in  the  corporation.  It  represents  ownership 
in  the  corporate  property  and  the  right  to  participate  in  the  control  of  the 
corporation,  but  it  does  not  attach  to  any  particular  part  of  the  corporate 
property  and  represents  such  rights  only  as  the  law  gives  to  stockholders. 
On  the  other  hand,  a  bond  is  an  evidence  of  indebtedness,  and  may  be 
secured  by  a  mortgage,  in  which  event  it  is  called  a  mortgage  bond,  or 
may  be  unsecured,  in  which  case  it  is  called  a  debenture. 

34  By  whom  are  the  directors  of  a  corporation  usualy  selected,  and 
by  whom  are  its  officers  generally  chosen? 

Ansvmr.  The  directors  of  a  corporation  are  elected  by  the  stock- 
holders. In  some  States,  as,  for  example.  New  York  and  Pennsylvania, 
the  directors  for  the  first  year  are  named  in  the  certificate  of  incorporation. 

The  officers  of  a  corporation  arc  usually  elected  by  the  directors. 

258 


r 


Questions  and  Answers  in  Commercml  Law, 

^7,  State  generally  who  is  entitled  to  file  a  bill  to  compel  the  offi- 
cers and  directors  of  a  corporation  to  account  for  any  breach  of  duty  or 
breach  of  trust. 

Answer.  In  general,  a  bill  may  be  filed  by  a  stockholder  of  a  corpora- 
tion to  prevent  a  breach  of  duty  or  of  trust,  and  the  stockholders'  rights 
in  this  respect  are  not  affected  by  the  amount  of  his  holdings.  A  bill  may 
be  filed  for  the  same  purpose  by  a  director  to  remedy  the  breadies  of  his 
co-directors. 

Creditors  are  not  usually  given  any  right  to  interfere  in  the  manage- 
ment of  a  corporation  until  they  have  reduced  their  debt  to  judgment  and 
had  an  execution  return  unsatisfied.  "The  creditors  of  a  corporation 
have  no  right,  either  at  law  or  equity,  merely  because  they  are  creditors, 
to  interfere  in  the  management,  or  to  go  into  a  court  of  equity  to  restrain 
it  from  making  contracts  or  disposing  of  property,  unless  there  is  fraud 
or  breach  of  trust  to  give  the  court  of  equity  jurisdiction."  ("  Summary 
of  Law  of  Private  Corporations,"  by  Leslie  J.  Tompkins.) 

3a  (a)  What  is  a  corporation?  (b)  What  is  a  charter  of  a  cor- 
poration? (c)  Distinguish  between  a  public  corporation  and  a  private 
corporation,  (d)  How  is  a  corporation  organized?  (e)  Through  whom 
does  a  corporation  act  in  transacting  its  business? 

Answer,     (a)  See  answer  to  question  (i). 

(b)  In  the  days  when  corporations  were  formed  by  special  act,  the 
charter  of  a  corporation  was  the  legislative  act  which  authorized  certain 
persons  to  conduct  their  business  as  a  corporation  and  which  prescribed 
the  manner  in  which  the  business  was  to  be  conducted  and  the  corpora- 
tion was  to  be  managed.  At  the  present  time,  the  charter  of  a  corpora- 
tion usually  consists  of  the  certificate  of  incorporation,  filed  with  the  Sec- 
retary of  State,  together  with  the  general  corporation  laws  under  which 
the  corporation  was  formed,  and  the  provisions  of  which  apply  to  the 
management  of  the  affairs  of  the  corporation. 

(c)  See  answer  to  question  13. 

(d)  A  corporation  is  formed  in  Ohio  by  not  less  than  five  persons,  the 
majority  of  whom  must  be  citizens  of  the  State.  A  certificate  of  incor- 
poration must  be  subscribed  and  acknowledged  by  them  and  the  official 
character  of  the  officer  taking  the  acknowledgment  of  the  articles  must 
be  certified  to  by  the  clerk  of  the  Court  of  Common  Pleas  of  the  county 
where  the  acknowledgment  is  taken.  The  articles  are  then  filed  and  re- 
corded with  the  Secretary  of  State,  who  issues  a  certified  copy  of  the 
same.  After  the  articles  have  been  filed,  the  incorporators  meet  and  fix 
the  time  and  place  for  opening  the  books  of  subscription.  Notice  of  this 
meeting  must  be  inserted  for  thirty  days  in  a  newspaper  published  or  of 
general  circulation  in  the  county  or  counties  where  the  books  are  to  be 
opened,  but  such  notice  may  be  waived  by  written  agreement  of  all  the 
incorporators  entered  on  the  corporate  records.  At  the  appointed  time 
and  place  or  places  the  subscription  books  may  be  opened.  When  ten  per 
cent,  of  the  capital  stock  has  been  subscribed,  a  majority  of  the  incorpo- 

259 


Accmtntamy  Problems  and  Solutions. 


* 


I 
.1 


ii'f 


rators  may  certify  to  that  effect  in  writing  to  the  Secretary  of  State. 
Thereupon  a  meeting  of  stockholders  is  called  on  thirty  days'  notice  puh- 
liilied  as  aforesaid  for  the  purpose  of  electing  directors.  This  notice  may 
he  waived  hy  written  consent  of  all  the  incorporators  entered  on  the  rec- 
ords in  person  or  by  proxy.  The  incorporators  present  at  the  first  meet- 
ing  of  stockholders  act  as  inspectors  of  election  and  appoint  the  time  and 
place  for  the  first  directors'  meeting.  At  the  first  meeting  of  directors 
the  officers  are  elected  and  the  organization  is  completed. 

(e)  A  corporation  transacts  its  business  through  the  Board  of  Direc- 
tors. The  powers  of  the  Board  of  Directors,  in  most  States,  may  be  dele- 
gated to  an  executive  committee  made  up  of  members  of  the  board. 

351.  (a)  What  is  cumulative  preferred  stock?  Wherein  does  it 
differ  from  non-cumulative  stock?  (b)  What  arc  a  stockholder's  rights 
with  respect  to  the  hooks  of  a  corporation?  (c)  Under  what  theory  is 
a  corporation  stockholder  liable  to  creditors  for  unpaid  subscriptions  to 
corporation  stock?  (d)  Out  of  what  funds  may  dividends  be  paid?  (c) 
If  dividends  are  not  paid  in  accordance  with  your  answer  to  the  preced- 
ing question,  have  the  creditors  of  the  corporation  any  action  against  the 
company  or  its^  stockholders? 

Answer,,    (a)  See  answer  tO'  question  24., 

(b)  The  General  Code  of  Ohio,  Section  8673,  provides :  "  The  directors 
of  such  corporation,  when  organized,  shall  keep  a  record  of  all  stock  sub- 
scribed and  transferred,  and  its  secretary  or  recording  officer  shall  reg- 
ister all  subscriptions  and  transfers  of  stock.  For  that  purpose,  a  book 
shall  be  kept,  and  when  a  certificate  of  stock  is  assigned  and  delivered  by 
a  stockholder,  the  assignee  thereof  on  demand  may  have  it  duly  trans- 
ferred therein  by  such  officer,  who  at  the  time  shall  enroll  also  the  name 
of  the  assignee  as  a  stockholder.  The  hooks  and  records  of  such  cor- 
poration, at  all  reasonable  times,  shall  be  open  to  the  inspection  of  every 
stockholder." 

(c)  The  liability  of  a  stockholder  to  the  corporation  for  unpaid  sub- 
scriptions rests  on  the  theory  that  a  contract  has  been  made  with  the  cor- 
poration which  must  be  carried  out.  This  contract  becomes  an  asset  of 
the  corporation,  which  may  be  reached  like  all  other  assets  by  the  judg- 

m.ent  creditor. 

(d)  Dividends  are  paid  out  of  surplus  profits.  In  order  to  ascertain 
the  surplus  profits  from  which  a  dividend  may  be  made,  the  Ohio  statutes 
provide  that  in  the  account  of  profit  and  loss  there  shall  be  charged  and 
deducted  from  the  actual  profits:    "(i)  All  ordinary  and  extraordinary 

expenses,  paid  or  incurred,  in  managing  the  affairs  and  transacting  the 
business  of  the  corporation.  (2)  Interest  paid,  or  then  due  or  accruing, 
on  debts  it  owes.  (3)  All  losses  of  the  corporation.  In  computing  Its 
losses,  debts  owing  to  it  which  have  been  due  without  prosecution,  or  in- 
terest paid  thereon,  for  more  than  one  year,  or  upon  which  judgment 
was  recovered,  but  has  been  more  than  two  years  unsatisfied,  and  on 


260 


Questions  and  Answers  in  Commercial  Law, 


which  also  for  that  period  no  interest  was  paid,  shall  be  included."   (Gen- 
eral Code  of  1910,  Section  8726.) 

(e)  Section  8728,  of  the  General  Code  of  1910,  provides: 
**  Every  director  of  such  a  corporation  who  violates,  or  is  concerned  in 
violating,  any  provision  of  the  next  four  preceding  sections  shall  be  per- 
sonally liable  to  its  creditors  and  stockholders  for  any  loss  which  thereby 
they  respectively  sustain." 

40.  (a)  What  is  the  minimum  amount  of  capital  necessary  for  a 
business  corporation  formed  under  the  statute?  (b)  How  many  persons 
are  necessary  to  form  a  corporation  in  New  York?  (c)  How  are  direc- 
tors chosen?  (d)  Define  municipal  corporation,  stock  corporation,  (e) 
Is  a  corporation  liable  to  forfeiture  of  its  charter  for  non-user?  If  so, 
in  what  case? 

Answer,  (a)  Five  hundred  dollars,  (b)  Three  or  more  persons,  (c) 
The  directors  for  the  first  year  are  named  in  the  certificate  of  incorpora- 
tion. Thereafter  they  are  chosen  by  the  stockholders  at  a  time  and  place 
fixed  by  the  by-laws  of  the  corporation.  A  choice  is  made  by  the  plu- 
rality of  the  votes  cast  at  the  election.  Cumulative  voting  may  be  insisted 
upon  only  when  the  certificate  of  incorporation  so  provides. 

(d)  A  municipal  corporation  includes  a  county,  town,  school  district, 
village  and  city,  and  any  other  territorial  division  of  the  State  established 
by  law  with  powers  of  local  government. 

The  statute  defines  a  stock  corporation  as  a  corporation  having  a  cap- 
ital stock  divided  into  shares  and  which  is  authorized  by  law  to  distribute 
to  the  holders  thereof  dividends  or  shares  of  the  surplus  profits  of  the 
corporation.  A  corporation  is  not  a  stock  corporation  because  of  having 
issued  certificates,  called  certificates  of  stock,  but  which  are  in  fact  merely 
certificates  of  membership,  and  which  is  not  authorized  by  law  to  dis- 
tribute to  its  members  any  dividends  or  share  of  profits  arising  from  the 
operations  of  the  corporation. 

(e)  Section  36  of  the  General  Corporation  Law  of  New  York  pro- 
vides in  effect  that  if  any  corporation,  except  certain  forms  of  public 
service  corporations,  shall  not  organize  and  commence  the  transaction  of 
its  business  or  undertake  the  discharge  of  its  corporate  duties  within  two 
years  from  the  date  of  its  incorporation,  its  corporate  powers  shall  cease. 
Section  131  of  the  General  Corporation  Law  provides  that  the  attorney- 
general  may  bring  an  action  vacating  the  charter  and  annuling  the  ex- 
istence of  a  corporation  upon  the  ground  that  it  has  forfeited  its  priv- 
ileges or  franchises  by  a  failure  to  exercise  its  powers. 

41.  (a)  Has  the  treasurer  of  a  corporation,  as  such  officer,  any 
authority  to  bind  the  corporation  by  a  contract  for  work,  labor  and  serv- 
ices? (b)  Can  the  stockholders  of  a  business  corporation  lawfully  au- 
thorize a  transfer  of  its  entire  property  to  another  corporation  in 
exchange  for  the  stock  of  the  latter?    Explain. 


^1 


261 


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Accouniamy  Problems  and  Solutimis, 

A'mwer.  (a)  The  treasurer  of  a  corporation,  as  such  officer,  has  no 
authority  to  bind  the  corporation  by  a  contract  for  work,  labor  or  services 
unless  otherwise  provided  for  in  the  by-laws, 

(b)  Section  i6  of  the  Stock  Corporation  Law  provides : 

'*A  stock  corporation,  except  a  railroad  corporation,  and  except  as 
otherwise  provided  by  law,  with  the  consent  of  two-thirds  of  its  stock, 
may  sell  and  convey  its  property,  rights,  privileges  and  franchises,  or  any 
interest  therein,  or  any  part  thereof,  to  a  domestic  corporation  engaged  in 
a  business  of  the  same  general  character,  or  which  might  be  included  in 
the  certificate  of  incorporation  of  a  corporation  organizing  under  any 
general  law  of  this  State  for  a  business  of  the  same  general  character, 
and  a  domestic  corporation,  the  principal  business  of  which  is  carried  on 
in,  and  the  principal  tangible  property  of  which  is  located  within,  a  State 
adjoining  the  State  of  New  York,  may,  with  the  consent  of  the  holders 
of  ninety-five  per  centum  of  its  capital  stock,  sell  and  convey  its  property 
situate  without  the  State  of  New  York,  not  including  its  franchises,  to  a 
corporation  organized  under  the  laws  of  such  adjoining  State,  and  such 
sale  and  conveyance  shall,  in  case  of  a  sale  to  a  domestic  corporation, 
vest  the  rights,  property  and  franchises  thereby  transferred,  and  in  case 
of  a  sale  to  a  foreign  corporation,  the  property  sold  in  the  corporation  to 
which  they  are  conveyed  for  the  term  of  its  corporate  existence,  subject 
to  the  provisions  and  restrictions  applicable  to  the  corporation  conveying 
them.  Before  such  sale  or  conveyance  shall  be  made,  such  consent  shall 
be  obtained  at  a  meeting  of  the  stockholders  called  upon  like  notice  as 
that  required  for  an  annual  meeting." 

42.  (a)  Where  in  New  York  must  a  corporation  file  the  annual 
report  required  by  law?  (b)  What  must  this  report  contain?  (c)  What 
remedy  has  a  director  when  the  annual  report,  despite  his  protest,  has  not 
been  filed?    (d)  What  is  the  penalty  for  failure  to  file  an  annual  report? 

Answer,  (a),  (b)  and  (d)  These  questions  are  answered  by  Section 
34  of  the  Stock  Corporation  Law,  which  provides  as  follows : 

"  Every  domestic  stock  corporation  and  every  foreign  corporation  doing 
business  within  this  State,  except  monied  and  railroad  corporations,  shall 
annually,  during  the  month  of  January,  or,  if  doing  business  without  the 
United  States,  before  the  first  day  of  May,  make  a  report  as  of  the  first 
day  of  January,  which  will  state : 

(i.)  The  amount  of  its  capital    stock   and  the   proportion   actually 

(a.)  The  amount  of  its  debts  or  an  amount  which  they  do  not  exceed, 
(3.)  The  amount  of  its  assets  or  an  amount  which  its  assets  at  least 
equal. 

(4.)  The  names  and  addresses  of  all  the  directors  and  officers  of  the 
company,  and  in  the  case  of  a  foreign  corporation,  the  name  also  of  the 
person  designated  in  the  manner  prescribed  by  the  Code  of  Civil  Pro- 
cedure as  a  person  upon  whom  process  against  the  corporation  may  be 
served  wi:tliiii  this  Stite. 

262 


Questions  and  Answers  in  Commercial  Law, 

Such  report  shall  be  made  by  the  president,  or  a  vice-president,  or  the 
treasurer  or  a  secretary  of  the  corporation,  and  shall  be  filed  in  the  office 
of  the  Secretary  of  State.  If  such  report  be  not  so  made  and  filed,  any 
such  officer  who  shall  thereafter  neglect  or  refuse  to  make  and  to  file 
such  report  within  ten  days  after  the  written  request  so  to  do  shall  have 
been  made  by  a  creditor  or  by  a  stockholder  of  the  corporation  shall  for- 
feit to  the  people  the  sum  of  fifty  dollars  for  every  day  he  shall  so  neglect 
or  refuse." 

(c)  This  question  probably  refers  to  Chapter  564  of  the  Laws  of  New 
York  of  1890,  which  provided  that  if  such  report  were  not  made  and  filed 
all  the  directors  of  the  corporation  would  jointly  and  severally  be  person- 
ally liable  for  all  debts  of  the  corporation  then  existing  and  for  all  con- 
tracted before  such  report  should  have  been  made.  The  law  read  on  this 
point  as  follows : 

"  If  such  report  is  not  made  and  filed,  all  the  directors  of  the  corpora- 
tion shall  jointly  and  severally  be  personally  liable  for  all  the  debts  of  the 
corporation  then  existing  and  for  all  contracted  before  such  report  shall 
be  made.  No  director  shall  be  liable  for  the  failure  to  make  and  file  such 
report  if  he  shall  file  with  the  Secretary  of  State,  within  thirty  days  after 
the  first  day  of  January,  or  the  first  day  of  April,  as  the  case  may  be,  a 
verified  certificate  stating  that  he  has  endeavored  to  have  such  report 
made  and  filed,  but  that  the  officers  or  a  majority  of  the  directors  have 
refused  and  neglected  to  make  and  file  the  same,  and  shall  append  to  such 
certificate  a  report  containing  the  items  required  to  be  stated  in  such  an- 
nual report,  so  far  as  they  are  within  his  knowledge  or  are  obtainable 
from  sources  of  information  open  to  him  and  verified  by  him  to  be  true 
to  the  best  of  his  knowledge,  information  and  belief." 

These  harsh  provisions,  however,  have  been  repealed,  and  the  law  now 
stands  as  quoted  above  in  answer  to  questions  (a),  (b)  and  (d). 

43.  (a)  To  what  amount  may  a  stockholder  in  a  business  cor- 
poration be  held  liable  personally  when  sued  on  his  stockholder's  liabil- 
ity? (b)  Must  two  or  more  corporations  wishing  to  consolidate  into  one 
be  engaged  in  the  same  kind  of  business?  (c)  How  would  such  a  con- 
solidation affect  the  rights  of  previous  creditors  of  the  constituent  corpo- 
rations? (d)  After  the  voluntary  dissolution  (under  the  statute)  of  a 
business  corporation,  what  would  be  the  status  of  a  director  thereof,  re- 
specting claims  in  favor  of  or  against  such  corporation? 

Answer,  (a)  This  question  is  answered  by  Sections  56,  57,  58  and  59 
of  the  Stock  Corporation  Law,  which  are  as  follows : 

"  Everj'  holder  of  capital  stock  not  fully  paid,  in  any  stock  corporation, 
shall  be  ptrsonally  liable  to  its  creditors  to  an  amount  equal  to  the  amount 
unpaid  on  the  stock  held  by  him  for  debts  of  the  corporation  contracted 
while  such  stock  was  held  by  him.  As  to  existing  corporations,  the  liability 
imposed  by  this  section  shall  be  in  lieu  of  the  liability  imposed  upon 
stockholders  of  any  existing  corporation,  under  any  general  or  special 

263 


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llifalll I 

w ' 


Accouniancy  Problems  and  Solutions. 

law,  excepting  laws  relating  to  nionied  corporations  and  corporations  and 
associations  for  banking  purposes,  on  account  of  any  indebtedness  here- 
after contracted,  or  any  stock  hereafter  issued;  but  nothing  in  this  sec- 
tion contained  shall  create  or  increase  any  liability  of  stockholders  of  any 
existing  corporation  under  any  general  or  special  law. 

The  stockholders  of  every  stock  corporation  shall  jointly  and  sev- 
erally be  personally  liable  for  all  debts  due  and  owing  to  any  of  its  labor- 
ers, servants  or  employees,  other  than  contractors,  for  services  per- 
formed by  them  for  such  corporation.  Before  such  laborer,  servant  or 
employee  shall  charge  such  stockholder  for  such  services,  he  shall  give 
him  notice  in  writing  within  thirty  days  after  the  termination  of  such 
services  that  he  intends  to  hold  him  liable,  and  shall  commence  an  action 
therefor  within  thirty  days  after  the  return  of  an  execution  unsatisfied 
against  the  corporation  upon  a  Judgment  recovered  against  it  for  services. 

No  person  holding  stock  in  any  corporation  as  collateral  security,  or 
as  executor,  administrator,  guardian  or  trustee,  unless  he  shall  have  vol- 
untarily invested  the  trust  funds  in  such  stock,  shall  be  personally  sub- 
ject to  liability  as  a  stockholder;  but  the  person  pledging  such  stock  shall 
be  considered  the  holder  thereof,  and  shall  be  liable  as  stockholder,  and 
the  estates  and  funds  in  the  hands  of  such  executor,  administrator, 
guardian  or  trustee  shall  be  liable  in  the  like  manner  and  to  the  same 
extent  as  the  testator  or  intestate,  or  the  ward  or  person  interested  in 
such  trust  fund  would  have  been  if  he  had  been  living  and  competent  to 
act,  and  held  the  same  stock  in  his  own  name,  unless  it  appears  that  such 
executor,  administrator,  guardian  or  trustee  voluntarily  invested  the  trust 
funds  in  such  stocks,  in  which  case  he  shall  be  personally  liable  as  a 
stockholder. 

No  action  shall  be  brought  against  a  stockholder  for  any  debt  of  the 
corporation  until  judgment  therefor  has  been  recovered  against  the  cor- 
poration and  an  execution  thereon  has  been  returned  unsatisfied  in  whole 
or  in  part,  and  the  amount  due  on  such  execution  shall  be  the  amount 
recoverable,  with  costs,  against  the  stockholder.  No  stockholder  shall 
be  personally  liable  for  any  debt  of  the  corporation  not  payable  within 
two  years  from  the  time  it  is  contracted,  nor  unless  an  action  for  its  col- 
lection shall  be  brought  against  the  corporation  within  two  years  after  the 
debt  becomes  due;  and  no  action  shall  be  brought  against  a  stockholder 
after  he  shall  have  ceased  to  be  a  stockholder  for  any  debt  of  the  corpora- 
tion unless  brought  within  two  years  from  the  time  he  shall  have  ceased 
to  be  a  stockholder." 

(b)  Under  Section  15  of  the  Stock  Corporation  Law  and  Section  7  of 
the  Bttsieess  Corporation  Law  it  is  provided  that  corporations  may  merge 
or  consolidate  only  when  they  are  engaged  in  business  of  a  similar  nature. 

(c)  This  question  is  answered  by  Section  10  of  the  Business  Corpora- 
lion  Law,  which  provides  as  follows: 

"  Upon  the  consummation  of  such  act  of  consolidation,  all  the  rights, 
privileges,  franchises,  and  interests  of  each  of  the  corporations,  parties  to 


Questions  and  Answers  in  Commercial  Law. 

the  same,  and  all  the  property,  real,  personal,  and  mixed,  and  all  the  debts 
due  on  whatever  account  to  either  of  them,  as  well  as  all  stock  subscrip- 
tions and  other  things  in  action  belonging  to  either  of  them,  shall  be  taken 
and  deemed  to  be  transferred  to  and  vested  in  such  new  corporation, 
without  further  act  or  deed ;  and  all  claims,  demands,  property,  and  every 
other  interest  shall  be  as  effectually  the  property  of  the  new  corporation 
as  they  were  of  the  former  corporations,  parties  to  such  agreement  and 
act;  and  the  title  to  all  real  estate,  taken  by  deed  or  otherwise,  under  the 
laws  of  the  State,  vested  in  either  of  such  corporations,  parties  to  such 
agreement  and  act,  shall  not  be  deemed  to  revert  or  be  in  any  way  im- 
paired by  reason  of  this  chapter,  or  anything  done  by  virtue  thereof,  but 
shall  be  vested  in  the  new  corporation  by  virtue  of  such  act  of  consolida- 
tion; and  all  the  rights,  privileges,  franchises  and  property  of  the  cor- 
porations, parties  to  any  consolidation  heretofore  made  under  this  chap- 
ter, shall  vest  as  fully  in  the  new  corporation  thereby  created  as  they  were 
vested  in  the  corporation,  parties  to  such  consolidations." 

(d)  The  answer  to  this  question  will  be  found  in  Section  35  of  the 
General  Corporation  Law: 

"Upon  the  dissolution  of  any  corporation,  its  directors,  unless  other 
persons  shall  be  appointed  by  the  legislature,  or  by  some  court  of  com- 
petent jurisdiction,  shall  be  the  trustees  of  its  creditors,  stockholders,  or 
members,  and  shall  have  full  power  to  settle  its  affairs,  collect  and  pay 
outstanding  debts,  and  divide  among  the  persons  entitled  thereto  the 
money  and  other  property  remaining  after  payment  of  debts  and  neces- 
sary expenses.  Such  trustees  shall  have  authority  to  sue  for  and  recover 
the  debts  and  property  of  the  corporation,  by  their  name  as  such  trustees, 
and  shaU  jointly  and  severally  be  personally  liable  to  its  creditors,  stock- 
holders, or  members,  to  the  extent  of  its  property  and  effects  that  shall 
come  into  their  hands." 


44  In  a  certain  stock  corporation  only  50%  of  the  subscribed 
capital  has  been  paid.  A  has  paid  all  the  instalhnents  called  and  has 
loaned  to  the  company  an  additional  sum,  for  which  he  has  taken  its 
promissory  note,  and  has  transferred  the  note  to  B.  B  demands  payment 
May  the  company  call  further  installments  on  A*s  stock,  and  offset  the 
amount  so  called  against  the  promissory  note  held  bv  B-  Explain  vour 
answer. 

Answer.  The  point  involved  in  this  question  is  the  right  of  the  direc- 
tors to  make  calls  on  specific  stock  without  imposing  some  obligations  on 
stock  held  by  other  subscribers.  The  law  is  well  settled  that  calls  on  stock 
partially  paid  must  be  impartial  and  uniform.    The  directors  in  this  case, 

tw!f'^'  -"^"'^-r*  ^'"'''^'"^  ^"  ""^^^"^  ^  '^"  ^'^  ^'«  ^^^^^  ^d  the  call, 
tnerefore,  is  void. 

S,lt  ^ri!"  *f  '"'"f  *'  Commerce  Commission,  giving  its  powers. 
State  fully  how  ,t  gets  ,ts  constitutional  rights  of  Jurisdiction,  and  on 
What  railroads  it  may  exercise  its  powers. 


/I 


265 


Accmmiamcy  ProMims  and  Soiutims, 


Questions  and  Ansivets  in  Commercial  Law. 


Answer,  The  Interstate  Commerce  Commission  was  formed  under  the 
Act  of  February  4  1887,  entitled  "  An  Act  to  Regulate  Commerce."  The 
Commission  has  Jurisdiction  on  complaint,  and  after  full  hearing  to  de- 
termine and  prescribe  reasonable  rates,  regulations  and  practices,  and  to 
order  reparation  to  injured  shippers;  it  may  require  any  carrier  to  cease 
and  desist  from  unjust  discrimination,  or  undue  or  unreasonable  prefer- 
cnce,  and  it  may  institute  and  carry  on  proceedings  for  the  enforcement 
of  the  law.  The  Commission  may  also  inquire  into  the  management  of 
the  business  of  all  common  carriers,  subject  to  the  provisions  of  the  regu- 
lating statutes,  and  it  may  prescribe  the  accounts,  records,  and  memoranda 
which  shall  be  kept  by  the  carriers  and  may  from  time  to  time  inspect  the 
same.  Carriers  must  file  annual  reports  with  the  Commission,  and  such 
other  reports  as  from  time  to  time  may  be  required.  These  are  the  main 
powers  conferred  by  the  Act  of  1887  and  the  Amendatory  Acts.  The  Act 
applies  to  all  common  carriers  engaged  in  interstate  commerce,  and  by 
that  is  meant  commerce  with  foreign  countries,  amongst  the  various  States, 
or  in  the  territories  of  the  United  States.  The  authority  of  Congress  to 
pass  such  an  Act  is  based  on  Section  8  of  the  United  States  Constitution, 
which  provides  in  part  that  "  Congress  shall  have  power  to  regulate  com- 
merce with  foreign  nations  and  among  the  several  States,  and  with  the 
Indian  tribes." 

461  From  what  sources  are  dividends  to  be  paid  ?  Who  is  responsible, 
and  to  what  extent,  if  dividends  are  improperly  paid?  May  a  dividend  be 
legally  declared  if  former  losses  have  impaired  the  value  of  the  stock? 

Amn*er.  Dividends  are  declared  from  profits.  The  chief  difficulty  in 
ascertaining  the  fund  from  which  dividends  are  to  be  paid  arises  out  of 
the  confusion  of  ideas,  judicial  and  otherwise,  on  the  subject  of  the  true 
de^nition  of  the  word  "profits."  The  above  question  is  ambiguous,  for 
it  is  difficult  to  know  Just  what  is  meant  by  the  word  "  stock."  If  the  ex- 
aminer intended  that  word  to  be  synonymous  with  "shares  of  capital 
stock,"  the  answer  to  the  third  part  of  the  question  is  that  the  value  of 
the  shares  of  the  capital  stock  of  a  corporation  has  nothing  to  do  with 
the  right  of  the  directors  to  declare  a  dividend.  What  is  probably  meant 
by  the  word  '*  stock  "  is  *'  capital."  In  England,  previous  losses  need  not 
be  made  up,  '*  since  a  corporation  may  sink  its  capital  in  the  purchase  of 
property  producing  income  and  divide  that  income  without  making  pro- 
vision for  keeping  up  the  value  of  the  capital,  and  the  capital  may  be  lost, 
but  the  excess  of  current  receipts  for  current  expenses  may  still  be  ap- 
plied in  payment  of  a  dividend."    (10  Cyc.  553.) 

Cook  says  on  this  subject :  "  In  estimating  profits  a  year  for  the  pur- 
pose of  declaring  a  dividend,  it  is  not  necessary  to  take  into  account  the 
decrease  of  the  value  of  the  assets  and  the  impairment  of  the  capital  stock 
of  the  company  prior  to  that  year.  The  fact  that  in  a  year  prior  to  the 
declaration  of  the  dividend  some  portion  of  the  capital  has  been  lost  and 
has  not  since  been  made  good  affords  no  ground  for  restraining  the  pay- 
ment of  a  dividend  out  of  profits  subsequently  earned"    Cook,  however, 

900 


rites  a  number  of  English  cases  to  sustain  this  proposition,  but  gives  not 
a  single  American  citation.  Probably  the  American  law  agrees  with  the 
New  York  statutory  law,  which  provides  that  dividends  must  be  paid 
out  of  "surplus  profits."  The  following  statement  by  Morawetz  prob- 
ably expresses  the  prevailing  American  view:  "The  fund  provided  for 
carrying  on  the  business  should  therefore  be  kept  up  at  its  original 
amount;  and  if  it  has  been  reduced  by  loss,  no  dividend  should  be  de- 
clared until  the  losses  have  first  been  made  good." 

The  general  statutes  of  Florida  provide :  "  If  the  directors  shall  know- 
ingly declare  and  pay  any  dividend  when  the  corporation  is  insolvent,  or 
any  dividend  the  payment  of  which  would  render  it  insolvent,  they  shall 
be  jointly  and  severally  liable  for  the  debts  of  the  corporation  then  exist- 
ing to  the  extent  of  the  dividends  so  declared.  If,  however,  any  director 
be  absent  at  the  time  of  making  the  dividend  or  shall  at  the  time  object 
thereto  in  writing,  he  shall  not  be  so  liable."  (Section  2691.)  This 
statute  not  only  answers  the  second  subdivision  of  the  above  question  but 
indicates  that  the  Florida  statutory  law  in  respect  to  the  third  subdivision 
agrees  with  the  prevailing  American  view  as  above  set  forth. 

47.  Can  a  corporation  in  Illinois,  organized  to  build  and  operate  a  rail- 
way, carry  on  the  business  of  keeping  a  dry  goods  store?  Give  reasons 
for  your  answer  and  give  general  principles  applicable. 

Answer.  Inasmuch  as  the  business  of  keeping  a  dry  goods  store  is  not 
within  the  scope  of  the  corporation's  charter,  the  corporation  would  be 
engaged  in  ultra  vires  acts.  The  principle  involved  is  well  summed  up 
in  the  case  of  Leslie  vs.  Lorillard,  no  N.  Y.  519:  "The  contracts  of  cor- 
porations are  said  to  be  ultra  vires  when  they  involve  some  adventure  or 
undertaking  not  within  the  scope  of  their  charter,  which  is  their  rule  of 
corporate  action.  In  the  granting  of  charters,  the  legislature  is  presumed 
to  have  had  in  view  the  public  interest ;  and  public  policy  is  concerned  in 
the  restriction  of  corporations  within  charter  limits,  and  a  departure 
therefrom  is  only  deemed  excusable  when  it  cannot  result  in  prejudice  to 
the  public  or  to  the  stockholders.  As  artificial  creations  they  have  no 
power  or  faculties,  except  those  with  which  they  were  endowed  when 
created;  and  when,  as  is  frequently  the  case,  they  act  in  excess  of  their 
powers,  the  question  will  be:  Is  the  act  prohibited  as  prejudicial  to  some 
public  interest,  or  is  it  an  act  not  unlawful  in  that  sense,  but  prejudicial 
to  the  stockholders  ?  " 

In  the  case  given  in  the  above  question,  the  corporation  undoubtedly 
can  be  dissolved  by  an  action  brought  by  the  attorney-general. 

48.  Can  a  corporation  be  organized  in  Illinois  under  the  laws  of  that 
State  to  deal  in  real  estate? 

Answer.  In  the  State  of  Illinois  the  Business  Corporation  Law  ex- 
pressly prohibits  the  formation  of  business  corporations  for  the  purpose 
of  engaging  in  real  estate  brokerage. 

267 


Accmmiancy  Problems  and  Solutions. 

On  the  general  subject  of  the  power  of  corporations  to  hold  real  estate, 
the  following  historical  view,  taken  from  Toraplcins'  "  Summary  of  the 

Law  of  Private  Corporations;'  is  interesting: 

"The  common-law  rule  that  corporations  have  an  implied  right  to  pur- 
chase such  real  estate  as  was  necessary  for  the  purposes  of  its  business 
arose  at  a  time  when  busines  or  trading  companies  were  little  known. 
The  corporations  of  that  day  were  either  municipal,  ecclesiastical,  or 
charitable  in  their  nature,  and  the  first  were  naturally  limited.  The  ec- 
clesiastical and  charitable  corporations,  however,  invested  their  money 
in  lands,  for,  indeed,  there  was  little  else,  at  that  time,  which  would  bring 
m  an  income.  So  much  of  the  land  was  being  accumulated  by  these  cor- 
porations that  the  statutes  of  mortmain  were  passed,  in  which  not  only 
ecclesiastical,  but  lay  corporations  as  well,  were  forbidden  to  purchase 
lands.  These  statutes  were  never  enacted  in  the  United  States,  however, 
save  in  the  State  of  Pennsylvania,  and  a  long  line  of  decisions  support 
the  statement  that  corporations  have  ample  power  to  purchase  and  hold 
such  real  estate  as  is  necessary  and  reasonable,  in  order  to  carry  out  the 
purposes  of  its  incorporation;  and  this  implied  power  obtains  in  all  cases 
where  the  charter  or  enabling  statutes  are  silent." 

Save  in  those  cases  where  the  charter  confers  general  powers  to  pur- 
chase, a  corporation  cannot  lawfully  purchase  real  estate  for  any  object 
inconsistent  with  the  purposes  for  which  it  was  created. 

40.  State  the  steps  necessary  for  the  formation  of  a  joint  stock  associa- 
tion. 

In  what  respects  does  it  differ  from  an  ordinary  partnership,  and  in 
what  respect  does  it  resemble  a  corporation? 

Antwer.  The  first  part  of  this  question  is  covered  by  the  Joint  Stock 
Associations  Law,  Chap,  ag  of  the  Consolidated  Laws  of  New  York, 
which  in  part  it  as  follows : 

"The  articles  of  association  of  a  joint  stock  association  may: 

I.  Provide  that  the  death  of  a  stockholder  thereof,  or  the  transfer  of  his 
shares  of  stock  therein,  shall  not  work  a  dissolution  of  the  association; 

z  Prescribe  the  number  of  its  directors,  not  less  than  three,  to  have 
the  sole  management  of  its  affairs ; 

3.  Contain  any  other  provision  for  the  management  of  its  affairs  not 
inconsistent  with  law."  (Joint  Stock  Associations  Law,  Art.  II,  Section  3.) 

"Every  joint-stock  association  transacting  hnsiness  within  this  state 
shall,  within  sixty  days  after  its  formation,  and  in  each  January  there- 
after, file  with  the  secretary  of  state,  and  with  the  clerk  of  the  county  in 
which  its  principal  business  is  carried  on,  a  written  certificate,  signed  and 
verified  Ijy  its  president  and  treasurer,  stating  the  name  and  date  of 
organization  of  such  association,  the  number  of  its  stockholders,  the  names 
and  places  of  residence  of  its  officers,  and  Its  principal  place  of  business. 

-  .ijf  JUi 


Questions  and  Answers  in  Commercial  Law. 

Such  certificates  shall  be  recorded  in  such  oflices  respectively.  Any  such 
certificate,  the  record  thereof,  or  a  certified  copy  of  such  certificate  or 
record  shall  be  presumptive  evidence  of  the  truth  of  all  facts  therein 
stated  against  such  association,  its  officers  and  stockholders.  The  officers 
of  a  joint  stock  association  who  fail  to  comply  with  the  provisions  of 
this  section  shall  be  jointly  and  severally  liable  to  pay  to  the  people  of  this 
state  a  penalty  of  fifty  dollars  for  each  day  such  failure  continues."  (Joint 
Stock  Associations  Law,  Art.  Ill,  Section  4.) 

It  will  be  seen,  therefore,  that  the  steps  necessary  for  the  formation  of 
a  joint  stock  association  are  as  follows: 

Draw  up  in  triplicate  a  certificate  of  association  which  should  state  the 
name  of  the  joint  stock  association,  the  date  of  its  organization,  the  num- 
ber of  its  stockholders,  the  names  and  residences  of  its  officers,  and  its 
principal  place  of  business.  This  will  necessitate  a  meeting  of  the  stock- 
holders, at  which  the  terms  of  the  certificate  shall  be  agreed  upon.  The 
certificate  should  be  executed  and  one  copy  filed  in  the  office  of  the  Secre- 
tary of  State,  and  one  copy  filed  in  the  office  of  the  Clerk  of  the  County 
in  which  its  principal  business  is  carried  on,  within  sixty  (60)  days  after 
the  meeting.     Upon  filing  the  certificate  the  organization  is  completed. 

For  an  answer  to  the  second  part  of  this  question  see  answer  to  ques- 
tion 33. 

50.  May  a  stockholder  object  to  an  act  of  his  corporation  as  ultra  vires 
after  he  has  acquired  and  accepted  pecuniary  benefits  thereunder,  when 
such  act  is  neither  malum  prohibitum  nor  malum  in  set 

Answer.  It  is  now  fairly  well  settled  that  where  a  stockholder 
acquiesces  or  ratifies  an  act  which  is  ultra  vires  and  which  is  neither  ma- 
lum prohibitum  nor  malum  in  se,  he  may  not  object  to  the  act  subsequently. 
Some  courts  invoke  the  doctrine  of  waiver,  others  of  estoppel,  and  others 
rest  their  decisions  upon  the  equitable  principle  that  he  who  comes 
into  equity  must  do  so  with  clean  hands.  In  Burden  vs.  Burden,  (159 
N.  Y.  287,  54  N.  E.  17),  it  was  held  that  a  shareholder  cannot  assail  the 
right  of  his  corporation  to  hold  and  own  property  conveyed  to  it  as  part 
of  the  scheme  of  organization  entered  into  to  settle  differences  between 
himself  and  his  partner.  For  an  extended  discussion  of  this  subject  dwell- 
ing upon  the  effects  of  laches,  acquiescence  or  ratification  by  a  stock- 
holder on  his  right  to  object  to  acts  that  are  ultra  vires  and  also  mala 
prohibita  or  mala  in  se,  see  Cook  on  Corporations,  Section  728. 

An  important  case  decided  by  the  Court  of  Appeals  in  New  York, 
April  25,  191 1,  (Pollitz  vs.  Gould,  94  N.  E.  1088),  settles  the  doctrine  in 
New  York  that  in  the  absence  of  special  circumstances,  a  stockholder  may 
sue  in  behalf  of  the  corporation  to  avoid  an  improper  transaction  consum- 
mated before  he  acquired  his  stock.  While  the  opinion  distinctly  says  that 
the  question  of  acquiescence  by  a  stockholder  is  not  involved  in  that  case, 
certain  obiter  dicta  is  at  least  persuasive  authority  for  the  doctrine  that 

269 


Accountancy  Problems  and  Solutions. 

acquiescence  in  an  ultra  vires  act  prevents  the  stockholder  from  subse- 
quently questioning  it.    The  court  said : 

"  It  is  argued  that  if  one  buys  stock  subsequently  to  the  transaction,  he 
should  be  regarded  as  buying  subject  to  it,  and  not  be  permitted  to  question 
it  If  the  prior  holder  should  give  binding  consent  to  the  transaction,  this 
under  certain  conditions  undoubtedly  would  prevent  the  subsequent  pur- 
chaser from  questioning  it.  But,  in  the  absence  of  special  circumstances. 
I  fail  to  see  any  principal  of  estoppel  or  logic  which  makes  a  subsequent 
purchase  of  stock  so  subject  to  a  fraudulent  corporate  transaction  that 
the  purchaser  may  not  insist  upon  its  being  set  aside." 


PART  III 


370 


I( 


if 


C.  p.  A.  Examination  Papers. 

Below  is  a  reprint  from  The  Journal  of  Accountancy  of  a 
contrast  and  comparison  of  the  examination  papers,  given  by 
the  Illinois  and  Massachusetts  respective  State  Boards  of  Ac- 
countancy at  recent  examinations  for  the  C.  P.  A.  certificate, 
with  comments. 

The  following  are  representative  problems  of  the  second  Massachusetts 
examination,  held  in  June,   1910, 

Monday,  June  27,  19 10— 9  a.m.  to  1.30  p.m. 

Theory  of  Accounts 

Answer  questions  i,  2  and  3,  and  seven  others,  but  no  more.  Do  not 
repeat  questions,  but  write  answers  only,  designated  by  number  stated  in 
question  paper. 

1.  Trace  the  various  operations  in  a  well  regulated  office  from  the  time 
an  order  is  given  for  the  purchase  of  material  until  such  material  is  paid 
for,  to  protect  the  company  from  any  possible  loss  in  the  transaction. 

2.  In  what  ways  may  a  bookkeeper,  who  is  also  the  cashier,  conceal 
thefts ;  his  books  are  kept  by  double  entry  and  apparently  are  correct  ? 

3.  Describe  the  theory  of  double  entry  bookkeeping  and  state  its 
advantages. 

4.  Discuss  the  different  methods  of  dealing  with,  first  Repairs,  and 
second  Replacements,  in  connection  with  (a)  a  concern  that  writes  off 
annually  sufficient  depreciation  to  cover  the  life  of  the  machinery,  and  (b) 
a  concern  where  no  depreciation  is  written  off,  and  where  it  is  claimed 
the  machinery  is  kept  as  good  as  new. 

Can  you  name  some  other  reason  why  depreciation  should  be  con- 
sidered, in  respect  to  machinery,  other  than  that  of  wear  and  tear? 

5.  On  what  basis  should  the  following  assets  be  valued  in  the  prepara- 
tion of  a  balance  sheet:  (a)  Manufactured  goods,  (b)  partially  manu- 
factured goods,  (c)  raw  material,  (d)  accounts  receivable,  (e)  stocks, 
bonds,  and  other  investments,  (/)  notes  receivable? 

6.  Explain  how  you  would  install  a  system  of  bookkeeping  arranged 
so  that  only  the  proprietor,  officers,  and  auditor  shall  be  cognizant  of  its 
financial  condition  and  annual  profits  or  losses. 

7.  Purchases,  sales,  returns,  and  allowances  are  frequently  posted  to 
one  account  called  Merchandise.  De^ribe  the  limitations  of  an  account 
so  kept,  and  suggest,  with  your  reasons  therefor,  an  improved  method  of 
recordmg  these  transactions. 

273 


i*' 


I 


I 


Accountancy  Problems  and  Solutions. 

a  State  your  understanding  of  the  difference  between  Gross  Profit 
and  Net  Profit. 

9>   What  is  usually  included  in  the  account  "  organization  expenses " 

in  tiie  books  of  the  company?    How  should  this  account  be  treated?    Give 
reasons. 

10.  In  a  statement  of  the  earnings  of  a  business  to  be  sold  on  the  basis 
of  Its  eammg  capacity,  how  should  the  question  of  interest  paid  on  ac- 
counts payable,  on  notes  payable,  and  on  loans  be  treated? 

11.  If  any  money  has  been  received  by  a  company  on  account  of  work 
m  process,  how  should  such  repairs  be  treated? 

12.  Define  (a)  funded  debt,  (b)  floating  indebtedness,  (c)  fixed 
charges  May  interest  on  floating  debt  properly  be  considered  a  fixed 
charge? 

13.  What  is  a  contingent  liability?  For  what  purpose  and  in  what 
form  should  such  liabilities  appear  in  a  statement  of  financial  condition? 

14  What  is  a  sinking  fund? 

15  What  disposition  should  be  made,  by  a  trustee,  of  an  amount  re- 
ceived by  him  for  the  sale  of  the  "rights"  to  subscribe  to  stock?    Give 

reasons. 

Monday,  June  27,  1910— 9  a.m.  to  1.30  p.m. 

COMMERUAL  LaW 

Answer  questions  16,  17  and  four  others,  but  no  more.  Do  not  repeat 
questions,  but  write  answers  only,  designated  by  number  stated  in  question 
paper. 

i<5.  (fl)  A  and  B  are  partners.  A  issues  notes  in  the  firm's  name 
without  B's  knowledge  and  pockets  the  proceeds.  Is  the 
firm  liable?  If  so,  why? 
(b)  A  firm  owes  $100,000  and  has  assets  of  $50,000.  A  owes  $40,- 
000  and  has  $18,000,  B  owes  $2,000  and  has  $30,000.  What 
are  the  rights  of  the  firm  creditors  and  the  individual  cred- 
itors, and  how  should  the  assets  be  distributed  and  why? 

17.  When  is  a  merchant  insolvent  under  the  Bankruptcy  Act?  What 
constitutes  an  act  of  bankruptcy? 

18.  Explain  the  taxation  in  Massachusetts  of  (a)  a  foreign  corpora- 
tion, (b)  a  domestic  corporation,  (c)  a  firm, 

(1)  By  whom  taxed,  method,  and  rate. 

(2)  Where  they  have  factories  in  different  towns  within  the  state. 

(3)  Where  they  have  factories,  some  in  and  some  outside  the  state. 

(4)  Remedies  for  overtaxation. 

274 


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C.  p.  A.  Examination  Papers. 

19.  Define  General  Partnership  and  Special  Partnership. 

20.  (a)  In  organizing  how  should  the  capital  stock  of  a  Massachusetts 

corporation  be  paid?  ,    , 

(b)  A  Massachusetts  corporation  wishes  to  dissolve.     How  is  it 

done? 

21.  Define  real  property,  personal  property. 

22  Does  a  dividend  on  stock,  declared  before  a  testator's  death  but 
not  payable  till  after  his  death,  become  a  part  of  his  estate  or  does  it  be- 
long to  the  life  tenant  as  income? 

23.  State  the  difference  between  a  sale  and  a  consignment. 

24.  Define  the  following: 
(o)  Contract. 

(b)  Bill  of  exchange. 

(c)  Promissory  note;  state  essential  of  same. 

(d)  Chattel  mortgage. 

25.  What  constitutes  an  insurable  interest  in  property? 

Monday,  June  27,  1910— 2.30  p.m.  to  6  p.m. 

Auditing 

Answer  questions  26,  27,  28,  and  seven  others,  but  no  more.  Do  not  re- 
peat question,  but  write  answers  only,  designated  by  number  stated  m  ques- 
tion paper. 

26.  What  is  an  auditor?  What  are  his  duties  and  responsibilities? 
What  are  the  objects  to  be  attained  by  an  audit? 

27.  Describe  the  plan  of  audit  of  the  books  of  a  concern  other  than  a 
bank,  with  which  you  are  personally  familiar. 

28.  Describe  the  steps  necessary  to  make  a  complete  audit  of  a  savings 
bank. 

29.  How  may  the  correctness  of  the  following  items  in  a  balance 
sheet  be  determined :  (o)  Accounts  receivable,  (b)  securities,  (c)  inventory 
of  finished  stock,  (d)  inventory  of  raw  materials,  (e)  bank  balances,  (f) 
accounts  payable,   {g)  notes  payable? 

30.  In  preparing  the  balance  sheet  of  a  business  at  the  close  of  a  year, 
how  should  you  treat  each  of  the  following  items:  (a)  Bad  and  doubtful 
debts,  (&)  premiums  for  fire  insurance  unexpired,  (c)  interest  paid  10 
advance  on  notes  payable  discounted,  (d)  discount  on  accounts  receivable, 
(e)  discount  on  accounts  payable,   {f)   depreciation  of  plant. 

31.  Describe  the  various  steps  to  be  taken  in  auditing  the  accounts  of 
an  executor  for  the  first  year  after  the  death  of  the  testator. 

32.  Describe  the  steps  necessary  to  make  a  complete  audit  of  a  Trust 
Company. 

275 


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"'■^iic: 


l!  ill 


t|l 


Accountancy  Problems  and  Solutions. 

mat  all  habUihes  bad  been  brought  into  the  balance  sheet? 

brith  t  t^T'T'"'  T'^'  ''''""''"  ""'"'""^  »»  »^°""t  with  each 
l»r«nch  in  the  Ledger  and  charges  to  such  account  all  goods  sent  to  the 

^ents  for  stocfc    When  stock  is  taken  the  balance  of  each  branch  account 

»  treated  as  ordinary  Accounts  Receivable  and  is  included  in  the  General 

S^m   "T"  X  *'  ^    "  ^°"  »"  ""^  °»'J'^<=«°-  »°  *-  -etho^state 
them,  and  say  how  you  would  deal  with  the  accounts. 

^JL  ^*"''   K^«""y   J">"f   views   as   to   what   constitutes   capital   ex- 
P«iditnre  and  expenditure  properly  chargeable  against  revenue.     Under 

i«te  oT"""' """''' "° ""''''°' "' '""''''"' '"  "^"^""f  *^  «^f- 

3&   In  auditing  the  accounts  at  the  conclusion  of  the  first  fiscal  year 

stjc^'of  a^t^p**  """"""'  ■"  '"•''"'™  '°  ^'-^  -O-'^  '-''»  -0 

37-  State  what  means  should  be  adopted  to  verify  (o)  cash  sales  ^h^ 
.^counts  allowed,  (c)  discomats  received,  (d)  sold  goods  returned  (e) 
allowances  on  sales.  *  ^^ 

38.  A  manufacttirinfir  corporation  desires  a  certificate  of  its  averaire 
annual  profits  for  three  years;  after  charging  up  all  costs,  expenses  and 
depreciation,  and  an  allowance  for  bad  debts,  it  is  found  that  the  profits 

$io.c^'oo  ™^^^^^  f''"^"^'  ^""^  '^'  ^^*^°"^  ^'''  ^4,000.00  plus 

♦10.500.00  profit  on  sale  of  investments,  and  for  the  third  year  $72  000  no 
plus  $8,400.00  profit  on  the  sale  of  real  estate.  How  luW  you'Trk^ 
jour  certificate?  ^ 

»   What  is  the  duty  of  the  accountant  who  imdcrtakes  to  examine 
a  going  business  for  the  purpose  of  issuing  a  certificate  showing  the  net 
eaoiings  of  the  btisiness  for  the  preceding  five  years  to  (a)  the  owners 
W  those  investing  money  therein  on  the  faith  of  the  report? 

40.   What  safeguards  in  accounting  would  you  suggest  to  a  client  to 
prevent  loss  of  stock  by  theft?  ^  ^^ 

Wednesday,  June  29,  i9if>-9  a,m.  to  12  m. 
Pkactical  Acxxiunting 

PAIT  I 

Answer  question  41,  and  one  other,  but  no  more.    Do  not  repeat  cues 
^,  bnt  wnte  answers  only,  designated  by  number  stated  in  question 

^^L^rfTT^"  li  T'  ^^  ^°"*'^'"«  particulars  are  furnished  of 
Ac  position  of  John  Mapleton,  insolvent:  Factory  equipment  cost.  $15.- 
ooaoo;  estimated  to  realize.  |,o^.oo.    Stock  of  finished  goods.  ^10,^^; 

276 


C.  P.  A.  Examination  Papers, 

estimated  worth,  $7,500.00.  Material  and  supplies,  $2,500,00;  estimated 
worth  $1,000.00.  Furniture  and  fixtures,  $900.00;  estimated  worth.  $200.oa 
Investments  valued  at  $25,275.00,  of  which  $15,000.00  is  held  by  bankers 
as  security  for  a  loan  of  $12,000.00.  Accounts  receivable  $6,250.00,  of 
which  $2,500.00  are  good;  $1,250.00  bad,  and  $2,500.00  estimated  to  realize 
$1,500.00.  Cash,  $575.00,  of  which  $25.00  represents  petty  expense  items 
not  charged  up,  and  $50.00  an  I.  O.  U.  of  a  former  employee  which  is 
worthless.  Accounts  payable.  $28,500.00.  Notes  payable,  $25,000.00,  of 
which  $12,000.00  is  due  bankers.  Wages  due,  $500.00.  Rents  due  and 
past  due,  $1,000.00.  Capital  on  January  i,  1907.  as  shown  by  the  books, 
$15,000.00.  Loss  by  sale  of  investment  May  i,  1907,  $5»ooo.oo.  Loss  m 
trading  account  January  i,  1907  to  December  i,  1907.  $3,50o.oo.  Drawings 
charged  personal  account  of  John  Mapleton,  $1,000.00.  Make  up  a  state- 
ment of  affairs  and  a  Deficiency  Account  as  at  December  i,  1907. 

42.  The  fiscal  year  of  a  manufacturing  company  ends  June  30,  1908. 
and  the  bookkeeper  presents  a  statement  to  the  directors  made  up  in  the 
following  form: 

Gross  sales •   •    $285,000.00 

Increase  of  inventory   15,000.00 

$300,000.00 

Cost  of  sales: 

Operating  expenses,  material  and  supplies...  $257,000.00 

Plant   expense    12,000.00 

Freight  on  returned  goods 600.00 

Sundry  purchases,  finished  goods 10,400.00      28o,ooaoo 

$20,000.00 

Other  income: 

Miscellaneous  earnings   $1,500.00 

Profit   on   contracts 6,500.00 

Discount  on  purchases —  500.00         8,500.00 

$28,500.00 
Less: 

Discount  on  sales $2,875.00 

Rebates  and  allowances 1,125.00         4,000.00 

$24,5oaoo 

You  are  required  to  make  up  a  Profit  and  Loss  statement  in  regular  form, 
using  such  of  the  above  figures  as  may  be  necessary  together  with  these 
following:  Inventory,  June  30,  1907.  Material,  $115,000.00.  Supplies,  $35,- 
000.00.  Finished  goods,  $45,000.00 — Inventory,  June  30,  1908.  Material, 
$140,000.00.  Supplies,  $10,000.00.  Finished  goods,  $60,000.00.  Material 
used  in  factory  during  the  year,  $75,000.00.  Wages,  $122,500.00.  Fuel, 
$2,500.oa  Repairs  and  renewals,  $2,000.00.  Other  operating  expenses, 
$55,000.00,  which  includes  $25,000.00  supplies  used. 

277 


if 
* 


Accountancy  Problems  and  Solutions, 

43.  A  firm  of  four  partners  agree  to  sell  their  business  to  a  corpora- 
tioa  Tlieir  assets  and  liabilities  were  as  follows :  No.  i— Capital,  $145  - 
500.00 ;  No.  2— Capital,  $123,500.00;  No.  3— Capital,  $153,000.00;  No.  4— 
Capital,  $152,330.00;  Building,  $125,000.00;  Machinery,  fixtures,  etc,  $38,- 
33500;  Stock,  $150,940.00;  Accounts  receivable,  $328,680.00;  Bills  receiv- 
able, $37,005.00;  Cash,  $17,030.00;  Horses  and  wagons,  $1,230.00;  Unex- 
pired insurance,  $17500;  Accounts  payable,  $124,065.00. 

It  was  further  agreed  that  the  partners  were  to  be  paid  for  good  will, 
based  on  a  year  and  a  quarter  purchase  of  the  last  three  years'  profits] 
which  were  respectively  $32,620.00,  $37,450.00,  and  $50,650.00. 

Prepare  a  Balance  Sheet,  bringing  in  the  good  will  as  an  asset  and  dis- 
tributing it  among  the  four. 

Wednesday,  June  29,  1910— 1.30  p.m.  to  4.30  p.m. 
Practical  Accounting 

PART  n 

Answer  question  44  and  one  other,  but  no  more.  Do  not  repeat  ques- 
tions, but  write  answers  only,  designated  by  number  stated  in  question 

paper. 

44.  A  branch  office  business  was  started  at  the  first  of  the  year  the 
head  office  advancing  $5,000.00  cash.  During  the  first  year  merchandise 
was  shipped  to  branch,  invoiced  at  $75,000.00. 

An  auditor  checking  up  the  business  at  the  close  of  the  year  finds 
the  following: 

Merchandise  sales  were  $60,000.00,  with  selling  price  of  goods  twenty 
per  cent  advance  on  invoice. 

Proper  vouchers  were  on  file  duly  receipted  for  following  payments: 


Rebates  and  allowances  on  damaged  goods $1,500.00 

Salaries   and   other  expenses 

Freights    .......* 

The  books  also  showed: 

Remittances  to  head  office. . . . , $35,000.00 


4.500.00 
2,500.00 


Uncollected  accounts 


i5,ooaoo 


The  balance  of  the  sales  having  been  realized  in  cash,  less  rebates  and 

allowances  as  noted. 

The  cash  on  hand  and  inventory  of  unsold  goods,  together  with  the 
foregoing  records,  properly  account  for  everything. 

Prepare  statement,  such  as  an  auditor  would  make  in  reporting  to  the 
head  office,  balancing  the  business  of  the  branch  house. 

4S  Robert  Adams  and  William  Stevens  are  equal  partners.  On  the 
night  of  July  3d,  their  stock  and  fixtures  were  destroyed  by  fire  A  trial 
balance   which  Adams  had  at  his  home,  showed  the  following  condition 

of  the  l«% tr  at  the  close  of  business,  June  30th : 

278 


I 


C.  P.  A.  Examination  Papers, 

Robert  Adams   I^oo.oo       $7,450.00 

William  Stevens    600.00         7,450.oo 

Cash       3,30900 

Fixtures    ^'Soo.oo 

Merchandise  purchases   32,600.00 

Merchandise  sales   •■■  24^00.00 

Notes   receivable    •  •  •  1,000.00 

Notes  payable ^'^'^ 

Interest I20«>             50.oo 

Expense •  TSo.oo 

Customers 4,500.oo 

Creditors    3.259.00 

$45,009.00      $45,009.00 

The  property  is  fully  covered  by  insurance.  The  insurance  company, 
for  the  purpose  of  estimating  the  value  of  the  merchandise  destroyed. 
has  agreed  to  allow  35  per  cent  as  the  average  gross  gain  on  the  sales 
and  to  pay  66§  per  cent  on  the  value  of  fixtures  as  shown  by  the  ledger. 
On  the  basis  of  this  agreement,  state  the  result  of  the  business  and  the 
capital  of  each  partner. 

46.  The  capital  of  three  partners— A,  B,  and  C— in  a  manufacturing 
business.  January  i,  1896,  was  $26,000.00,  of  which  A  owned  one  fifth. 
B  two  fifths,  and  C  two  fifths.  On  December  31.  1896,  one  year  thereafter. 
the  condition  was  found  to  be  as  follows : 

Real  estate,  $15,000.00;  plant  and  machinery,  $7,000.00;  stock  on  hand, 
$2,000.00;  book  debts  receivable,  $6,000.00;  cash  in  bank.  $2,500.00;  cred- 
itors' notes  payable,  $8,000.00. 

Partners'    withdrawals— A  (including  interest)  ....    $1,500.00 

B         "              "         ....      1,200.00. 
<•  "  C        "  "         2,ooaoo 

After  crediting  up  interest  on  capital  at  the  rate  of  six  per  cent,  show 
the  net  result  for  the  year,  and  distribute  the  same,  in  proper  proportions, 
to  the  partners'  accounts. 

Prepare  individual  partners'  accounts,  showing  the  condition  of  each 

at  the  end  of  the  year. 

The  following  are  the  Problems  and  Questions  of  the  Illinois 
Examination,  held  in  December,  1910. 

Wednesday,  December  21,  1910— 9.30  a.m.  to  12.30  p.m. 

Theory  of  Accounts 

Seventy-five  credits  necessary  to  pass,  out  of  a  possible  100  credits. 

Each  complete  answer  will  receive  ten  credits.    Do  not  repeat  questions 

on  examination  papers,  but  write  answers  only,  designating  the  questions 

279 


I 


Accomiamy  ProMefns  and  Solutions, 

!1SL  In^'  '«f  i«««^e  mdicated  by  answers  will  be  considered  in 
marking  tbe  applicants,  as  well  as  the  technical  acairacy  of  such  answer" 

eouLMZr^''^";/*  *'  dependent  audit  by  a  certified  public  ac- 
countant, how  would  you  endeavor  to  oriranizi.  th-  i;«,«.«i 
tiid  the  system  of  bookkeeping  of  a  lllTlZo^L^T   arrangements 
might  be  the  best  internal  check  possible?  *=°^^^^*°"*  ^°  ^*^^  ^^^-^^ 

a.   Give  an  example  of  that  portion  of  a  Balance  Sheet  of  a  corooration 

^^ttt:  :me  *'^f  ^"  ^"'  ^^^^^^^^^  ^^^^^^^  A-uir  s^n^ 

set  out  the  same  m  the  proper  columns,  assuming  the  followin^x  *n^ 
the  position  of  the  Compan/s  Share  and  bebenre  ct^f  ^''"^  *°  ^ 

Share  capital,  authorized f  ,«o  nnn  n^ 

Share  capital,  issued  or  subscribed [ «oC'^ 

Share  capital,  called  up. ...                       «o.ooaoo 

Calls  paid  in  advance e!!!*!! 

Calls  in  arrear 5.ooaoo 

Debenture  capital,  authorized .' .' ,*  *  .* .' .*.'.'.■.■ *  * '         ''!???? 

Bebenture  capital,  issued  or  subscribed. . .' ." .' ."  .* .' '       4^0^"!! 
Debenture  capital,  paid  up .'       ^^Z 

him^in^rJZ"'^''  """  "'f  "*^  ''^''  ^^  ^"^'^^^^  having  asked  you  to  give 

i„,™f  T"^"'-  '''""K  $SOO.ooaoo  of  Debentures,  bearing  five  per  cent 
interest,  which  have  been  in  existence  fnr  «.™.  >  ■"=«'"8  nve  per  cent 

..     .  •tuiiurj  I,  igo7,  arranges  to  provide  the  necessarv  ranlt^l  k. 

*e  .ss„e,  a,  par,  of  $s«,.ooo.oo  four  per  cent  permane^rStuTstU' 

me  half  year?    Give  the  reasons  upon  which  your  opinion  is  based. 

S   A  irm  is  in  the  habit  of  supplyinir  ffoods  tm  fh*.  «,^««:«i      t     , 
or  return  takinir  ««„«•«♦-  k    •     "f,*^  •*^*"»  «ooas  on  tfte  pnnciple  of  sale 
ih-s  nZ.1!!   r  ?^^™r*»  ^^  installments  covering  principal  and  interest 

iHf  the  installments  oaid     Mn™,  ...^..o  ^        ^  lorteit- 

•IMonal  sales  sh,™ld  te  en,«^^  T^l  you  recommend  that  such  con- 
!•*  I-  7.  ,  """*"  •'<*  entered  m  the  books  of  the  «elliniy  firm  m^A 
how  should  the  outstanding  amounts  be  from  time  to  timfv^edr 

«»»;„?!  "=»'"''''♦»"  of  the  percentage  of  profits  is  sometimes  based  upon 
^.^  mrthrr"  "r  1«^  ^    Which  do  yon  regard  as  L  Z^. 

oIi«  .iV,!f'^\"'T*''*'""«  ~°"™  P"'cha«s  of  material  and  sun- 
plies  pass  through  the  storekeeper.  What  «vst,.m  nf  kJuI.  •  T 
check  would  yon  advise  to  safe-n^rrf  ,Z  !T?  J  ^^^^<V'»g  and 
Folly  explain  the  «Z.  ^        "''  ~"'"*'  *'  distribution  of  both? 

woSdlL'^.  *'  '^''1°*  *  ~"P»"'  »'  *«  fi«^  period,  what  steps 
would  r«.  take  10  insure  that  all  liabilities  to  date  had  been  iilclTd^? 


d 


C.  P,  A.  Examination  Papers, 

9.  In  taking  off  a  trial  balance,  a  bookkeeper  finds  that  his  debit  foot- 
ings exceed  the  credit  by  $131.56,  which  he  carries  to  a  suspense  account 
Later,  he  discovers  that  a  purchase  amounting  to  $4i7-50  has  been  debited 
to  a  creditor  as  $192.94;  that  $312.50  for  depreciation  of  furniture  has  not 
been  posted  to  depreciation  account;  that  $500.00  withdrawn  by  the 
principal  has  been  charged  against  wages  account;  that  a  discount  of 
$76.13  allowed  to  a  customer  has  been  credited  to  him  as  $71.13,  and  that 
the  total  of  sales  returned  was  footed  $5.00  short  Give  detailed  entries 
showing  how  you  would  remedy  these  errors,  and  starting  with  the 
original  difference  prepare  a  supplemental  trial  balance  showing  whether 
the  books  balance  or  not 

10.  A  corporation's  profits  for  the  year  ended  December  31,  1908, 
amount  to  $451,000.00.  The  by-laws  require  a  reserve  equal  to  ten  per 
cent  of  any  dividend  paid  to  the  common  stockholders,  and  any  surplus 
remaining  after  such  dividend  has  been  paid  is  also  to  be  applied  to  the 
reserve,  until  such  dividend  has  been  paid  is  also  to  be  applied  to  the 
reserve,  until  such  reserve  account  amounts  to  $250,ooo.oa  The  reserve 
at  December  31,  1907,  was  $156,020.00.  The  capital  is  $2,000,000.00— one 
half  cumulative  preference  five  per  cent,  and  one  half  common,  all  fully 
paid.  On  December  31,  1908,  the  preferred  dividend  is  two  and  one  half 
years  in  arrear.  On  December  31,  1907,  profit  and  loss  account  was  in 
debit  $202,000.00.  Set  out  your  treatment  of  the  profit  for  1908,  and  com- 
ment concisely  on  the  position. 


Friday,  December  23,  1910— 9.30  a.m.  to  12.30  p.m. 

CoMMERaAL  Law 

1.  Name  the  necessary  elements  of  a  valid  contract  What  contracts 
under  the  law  of  Illinois  are  required  to  be  in  writing?  What  is  the 
legal  effect  of  attaching  a  seal  to  a  contract? 

2.  Prepare  a  short  form  of  partnership  agreement  for  equal  partners. 
Wherein  does  a  partnership  differ  from  a  corporation? 

3.  What  are  the  general  obligations  of  a  common  carrier  of  goods? 
Of  a  carrier  of  persons?    What  is  a  bill  of  lading? 

4.  What  is  the  Statute  of  Frauds? 

5.  How  much  of  the  capital  stock  of  a  corporation,  organized  under 
the  laws  of  Illinois,  must  be  paid  in  before  a  charter  can  be  obtained? 
What  are  the  obligations  of  a  subscriber  to  the  capital  stock  of  a  corpora- 
tion organized  under  the  laws  of  Illinois  respecting  payment  for  the  stock 
subscribed  for  by  him? 

6.  What  is  the  lawful  rate  of  interest  in  Illinois  in  the  absence  of  a 
contract?    To  what  rate  may  the  parties  contract? 

281 


« •"■■ iiIiiimM^^^^^^^^^^ 


! 


Accountancy  Problems  and  Solutions, 

7.  Define  the  following:  (i)  Legal  tender  (2)  Bona  fid<^  J^)  f  oim- 
t  J  (4)  Recoupment  (S)  Ultra  .ires  (6)  Non  compos  mentis.  (7) 
Proxy     (8)  Debenture.    (9)  A««>t.    (10)  Power  of  attorney 

Stete  the  difference  between  an  administrator  and  an  executor. 

a  What  18  a  limited  partnership  under  the  laws  of  the  State  of 
Illinois? 

f.  What  ire  the  obligations  of  a  bailee  for  hire? 

m  Wherein  does  a  mortgage  differ  from  a  trust  deed? 

Wednesday,  December  21,  1910— 1-30  p.m.  to  4-3°  '•^• 

Auditing 
Swenty-fivc  credits  necessary  to  pass,  out  of  a  possible  one  hundred 

*=^h  complete  answer  will  receive  ten  credits.    Do  not  rep«.t  questbns 
«.ramination  papers,  but  write  answers  only,  ^^-^^'^"f "« '^^^^^^^^ 
by  Minber.    The  intelligence  indicated  by  answers  will  be  ^^onsidtrtdm 
lirgle  applicants,  as  well  as  the  technical  accuracy  of  such  answers. 

1.  During  the  audit  you  are  making  of  the  accounts  of  a  corporation 
you  become  aware  of  a  claim  against  the  company  which  you  Aink  . 
lidyTbe  enforced,  but  which  the  directors  do  not  recognize   and  for 
wWch  they  will  make  no  reserve.    What  would  you  do  m  the  circum- 
stances? 

2.  State  shortly  the  duties  of  an  auditor  of  a  corporation. 

3.  A  corporation  is  established  for  working  a  patent  of  which  ten 
jjs  are  unexpired,  and  for  which  a  sum  of  money  has  been  paid.  How 
JLid  the  company  deal  with  this  asset,  and  what  is  the  duty  of  the 

auditor  in  respect  of  it?  .  t.       1        r  :*„ 

4  How  should  an  incorporated  coal  company  estimate  the  value  of  ,ts 
colliery  in  its  Balance  Sheet  from  time  to  time,  first  as  a  Freehold,  sec- 
i»ay  as  a  Leasehold? 

5  Write  out  a  short  Audit  Certificate  dealing  with  a  ^«r,  ^^^^.^  ".^ 
wUth  sometimes  arise  in  an  audit,  and  have  to  be  specially  dealt  with 
by  the  auditor  in  his  certificate. 

4  In  the  case  of  an  incorporated  company  making  considerably  more 
proit  than  usual  in  one  year,  owing  to  extensive  purchases  on  a  rising 
iTket.  would  you  advise  declaring  a  proportionately  larger  dividend. 
or  what  would  be  your  recommendation?    State  your  reasons. 

7.  In  auditing  the  books  of  an  importing  and  domestic  wholesale  wine 
and  liquor  dealer  how  would  you  assure  yourself  of  the  correctness  of 
tie  inventory  as  to  the  bonded  stock? 

a  Beyond  the  mere  detailed  checking  of  purchase  invoices  to  the 
Mm  «co«its  with  dealers,  can  you  suggest  any  steps  that  mig^  be 
tSren  which  might  be  advisable  with  the  view  of  the  prevention  of  fraud  f 

282 


C.  P,  A,  Examination  Papers. 

9.  A  corporation  invests  its  Reserves  outside  its  business.  On  the 
mndit  of  the  accounts  explain  what  steps  you  would  take  to  verify  the 
full  receipt  of  the  investment  income  and  the  safe  custody  of  the  trust 
funds. 

10.  Upon  the  audit  of  the  partnership  accounts  of  a  manufacturing 
business  the  following  conditions  are  revealed: 

(i)  Sales  toward  the  end  of  the  period  are  unusually  large. 

(2)  A  large  deposit  in  bank  is  made  on  the  closing  fiscal  date,  which 

amount  is  credited  to  the  bank  two  weeks  later. 

(3)  Machinery  sold  has  been  credited  to  merchandise  sales. 

(4)  A  loan  to  the  firm  has  been  credited  by  mutual  consent  to  the 

capital  account  of  one  of  the  partners. 

(5)  Depreciation  or  discount  from  the  value  of  a  certain  class  of  the 

inventory  instead  of  being  thirty  per  cent  as  in  prior  years  is 
shown  as  ten  per  cent 

What  would  you  deduce  from  these  facts,  and  what  would  you  fed 
called  upon  to  do  by  way  of  extended  inquiry  or  report  in  each  of  these 
instances? 

Thursday,  December  22,  1910—9.30  a.m.  to  12.30  p.m. 
Practical  Accounting 

PAST  I 

Seventy-five  credits  necessary  to  pass,  out  of  a  possible  one  hundred 
credits. 

Each  complete  answer  will  receive  ten  credits.  Do  not  repeat  questions 
on  examination  papers,  but  write  answers  only,  designating  the  questions 
by  number.  The  intelligence  indicated  by  answers  will  be  considered  in 
marking  the  applicants,  as  well  as  the  technical  accuracy  of  such  answers. 

I.  Prepare  a  Trading  and  Profit  and  Loss  Account  from  the  follow- 
ing Trial  Balance  and  data  for  the  year,  ended  December  31,  1909 : 

The  stock  of  stores  and  materials  at  the  end  of  the  year.  December 
3if  1909.  was  $8,500.00.  The  rent  at  the  rate  of  $2,500.00  was  paid  up 
to  September  30th.  Bad  debts  amounting  to  $850.00  have  to  be  written 
off.  A  provision  of  $1,250.00  has  to  be  made  to  meet  possible  bad  debts. 
Depreciation  at  the  rate  of  five  per  cent  per  annum  on  the  plant  at  January 
I,  1909,  has  to  be  written  off.  The  wages  are  paid  up  to  December  27th ; 
the  wages  from  that  date  to  December  31st  amount  to  $175.00.  Interest 
at  five  per  cent  per  annum  has  to  be  passed  on  the  amount  of  the  partners* 
capital  accounts  at  January  i,  1909.  (No  interest  on  partners'  current 
accounts.)  Profits  to  be  divided  equally  between  the  partners.  The  neces- 
sary entries  for  division  of  profits  and  interest,  etc..  to  be  passed  through 
the  partners'  current  accounts.  It  is  assumed  that  no  further  entries  are 
required  to  be  made  to  complete  the  accounts. 

283 


/. 


/" 


m 
M 

I 


I* 


Accountancy  Problems  and  Solutions. 


I&kmon  &  White, 

Trial  Balance,  December  31, 

Invcstnients    ,,.,....• ■ *•• 

Accounts  payable   • 

Stores  and  materials,  January  i,  1909 

Jolinson's   capital 

Wfiite's  capital 

Purchases 

Jolinson's  current  account 

White's  current  account 

Accounts  receivable 

Wages 

Rent 

Dividends  on  investments  •  • .  • •  •  • 

Plant,  January  1,  1909... 

Bills  payable • .  • 

Bank    .^ 

Office  expenses  and  salaries 

Installments   received   on   account   of   work   in 
progress 

Bills   receivable 

Cash  in  office  

Law  and  accountan<^ 

Repairs 

Work  in  progress,  December  31,  1909. 

Bank  charges  .......*.• < 

Sales • 


charges. 


1909 

$2,410.00 

2,i2aoo 


24,225.00 
2,310.00 

3,91000 
13,265.00 
27,825.00 

1,875.00 

44,100.00 


2,100.00 


40.00 

3,670.00 

50.00 

255.00 

330.00 

25,905.00 

90.00 


29,600.00 
15,300.00 


115.00 

4,975.00 
975.00 


I4t355.00 


70,035.00 

$154,480.00    $154,480.00 


2.  Prepare  a  Balance  Sheet  and  Partners'  Current  and  Capital  Ac* 
counts  from  the  above  trial  balance. 

3.  Prepare  a  statement  of  the  affairs  of  Messrs.  Wilson  &  Company 
from  the  following  figures: 

Cash  on  hand,  $50.00.  Debtors  good,  $2,500.00.  Debtors  bad,  $250.oa 
Debtors  doubtful,  $5,000.00,  which  are  estimated  to  realize  $3,750.00.  Cred- 
itors unsecured,  $13,000.00.  Creditors  partially  secured,  $6,000.00;  esti- 
mated value  of  security,  $4,000.00.  Creditors  fully  secured,  $9,500.00;  esti- 
mated value  of  security,  $12,000.00.  Landlord,  creditor  for  rent,  $i,35aoo^ 
of  which  sum  he  is  a  preferred  creditor  for  $1,200.00.  Factory  manager, 
creditor  for  salary,  $750.00,  of  which  sum  he  is  a  preferred  creditor  for 
|aso.oo.  Liabilities  on  notes  discounted,  $3,250.00,  all  of  which  are  ex- 
pected to  be  duly  met  at  maturity.  Stock  of  merchandise  cost  $4,250.00; 
estimated  to  realize,  $3,750.00.  Interest  in  a  lease  of  business  premises 
estimated  to  be  worth,  $900.oa  There  is  a  liability  in  respect  of  a  con- 
iCt  which  the  debtors  cannot  complete,  owing  to  the  failure,  amount 
known,  but  estimated  at  $i,500xxi.  Bills  receivable  on  hand,  $375.00; 
estimated  to  produce,  $100.00. 

4.  The  following  statements  of  account  and  balance  sheets  were  pro- 
icntcd  to  the  members  of  a  dub  in  the  two  years  mentioned.  Abstract 
of  receipts  and  expenditures  for  the  years  1908  and  1909: 


C.  P.  A.  Examination  Papers. 

Year  ended  Year  ended 

Dec.  31,  '08  Dec.  31,  '09 

To  balance  for  preceding  year $4,000.00  $5,840.00 

To  entrance  fees  received  4,98500  5.09500 

To  subscriptions    •        37,870.oo  38,15500 

To  subscriptions  received  in  advance  for  1909  ano 

jgio 420.00  210.00 

To  sales  of*  provisions,  etc. 85,52500  76,190.00 

To  receipts  for  billiards,  cards,  cigars,  etc o>"o.oo  5.360.00 

$138,910.00  $130,850.00 

By  rents,  taxes,  etc.   $13,76500  $14,055.00 

By  interest 9,38500  9,995-00 

By  purchases  of  provisions,  wines,  etc 74,900.00  67,190.00 

By  billiards,  cards,  cigars,  etc 2,315.00  2,ooaoo 

By  salaries  and  wages  16,240.00  16,15500 

By  fuel,   light,   repairs,   renewals ;    additions   to 

furniture,  etc 14,465.00  18,625.00 

By  club  debentures  paid  off 2,000.00  2,000.00 

By  balances  at  bank  and  in  hand: 

1908  1909 

$20,675.00     $16,450.00 
Less:    Accounts    out- 
standing,   included    in 

expenditure  above....        1433500       15,620.00         5,840.00  830.00 

$138,910.00  $130,850.00 


Balance  Sheet 


Year  ended 
Dec  31,  '08 


Year  ended 
Dec.  31,  '09 


Assets: 

Club  house,  furniture,  China,  glass,  etc....    $224,200.00    $224,200.00 
Balance,  Jan.  i, 

1908  1909 

$30,000.00      $30,915.00 
Additions  to  Dec.  31         4,35o.oo         4,750.00 

.    .  $34,350.00     $35,665.00 

Less:  Depreciation 3,435.oo         3,S50.oo  30,915.00  32,115.00 

Stock  of  wines,  etc 5,115.00  4,87500 

Stock  of  cigars,  cards,  etc 275.00  375.00 

Cash  at  bank  and  in  hand 20,675.00  16,450.00 

$281,180.00    $278,015.00 


Liabilities: 


Year  ended 
Dec  31,  '08 


Club  debentures    $219,000.00 

Subscriptions  received  in  advance 420.00 

Sundry  creditors  14,835.00 

Balance  in  favor  of  the  club 46,925.00 


Year  ended 
Dec  31.  '09 

$217,000.00 

210.00 

15,620.00 

45,185.00 


$281,180.00    $278,015.00 


285 


I   : 


4 


I    i 


Accotmiancy  Problems  and  Solutions, 

State  in  what  respect,  as  regards  information  or  otherwise,  you  would 
consider  the  above  Statements  and  Balance  Sheets  incorrect,  and  un- 
satisfactory to  the  members  of  the  dub. 

5.  Assuming  the  Assets  and  Liabilities  stated  on  the  above  Balance 
Sheets  to  be  true,  and  the  analysis  of  the  receipts  and  payments  of  the 
year  1909  to  be  accurate,  state  the  Income  and  Expenditures  of  that  year 
in  such  a  way  as  to  correctly  show  the  actual  results  of  the  year's  opera- 

UMUSa 


Thursday.  December  22,  1910—1.30  f.m.  to  4.30  p.m. 
FiACTicAL  Accounting 

PART  n 

Seventy-five  credits  necessary  to  pass,  out  of  a  possible  one  hundred 

credit!* 

Each  complete  answer  will  receive  ten  credits.  Do  not  repeat  quea^ 
tions  on  examination  papers,  but  write  answers  only,  designating  the  ques- 
tions by  number.  The  intelligence  indicated  by  answers  will  be  con- 
sidered in  marking  the  applicants,  as  well  as  the  technical  accuracy  of 
snch  answers. 

4  A  and  B  agree  to  dissolve  partnership  December  31,  1908.  The 
■tated  Balance  Sheet  was  as  follows: 

Merchandise  inventory $57,500.00 

Furniture  and  fixtures 2,000.00 

Accounts  receivable 85,500.00 

BEls  receivable   (discounted) 14,000.00 

Good  will 5,000.00 

$l64,OOOyll» 

Lmmtties: 

Accounts  payable  ..................' $50,000.00 

Bils  payable 11,500.00 

Bills  receivable   (discounted)    14,000.00 

A's  capital  account. 53,500.00 

B's  capital  accoimt. 17,500.00 

Income  account 15,000.00 

$i64/xxxoo 

Profits  are  divisible,  A  4/7,  and  B  3/7,  five  per  cent  being  allowed  on 
capital,  and  no  interest  charged  on  drawings,  which  were  upon  the  baua 
of  $2,5<MXOO,  each.  A  continues  the  business  and  assumes  all  liabilities^ 
B  opening  up  business  elsewhere  takes  one  fourth  of  the  stock  and  agrees 

a86 


C.  P,  A.  Examination  Papers, 

to  leave  in  the  business  $2,500.00  as  guarantee  for  one  year  against  float- 
intr  liability  for  bad  debts  and  discounted  merchandise  notes,  and  to 
receive  or  pay  any  balance  in  cash,  any  amount  received  bemg  denvcd 
from  accounts  due  the  firm. 

Prepare  A's  balance  sheet  after  dissolution  expressive  of  the  terms 

stated. 

7.  The  Energy  Manufacturing  Company  draws  on  its  customer,  Slopay 
&  Company,  at  two  months  from  date,  January  i,  1910,  for  $5,ooaoo 
and  three  days  thereafter  discounts  the  draft  with  the  City  National 
Bank  at  five  per  cent  per  annum,  net. 

At  maturity  S.  &  Co.  confess  they  cannot  meet  the  draft,  but  pay 
the  E.  Mfg.  Co.  $3,000.00  on  account,  and  give  an  acceptance  for  a  like 
period  for  the  balance,  upon  condition  that  the  E.  Mfg.  Co.  retire  the 
original  draft,  which  is  done. 

Detail  serially  the  entries  by  which  the  E.  Mfg.  Co.  should  record 
these  transactions  on  its  books. 

8.  A  testator  directed  that  the  income  of  his  estate  should  be  paid  to 
the  widow  during  her  lifetime,  and  in  the  event  of  her  death  the  income 
to  be  divided  equally  between  his  son  and  two  daughters.  The  widow 
died  on  August  i,  1908.  The  income  of  the  estate  for  the  year  1908  was 
as  follows: 

January       i.— Commonwealth  Electric,  interest $300.00 

February   28.— Mortgage,  interest.  South  Chicago 480.00 

March       31.— Mortgage,   interest,   Evanston 660.00 

April            i.~Rent  of  bam  120.00 

May            I.— Bank  dividend   Siaoo 

June            2. — Santa  Fe,  interest  285.00 

July              I. — Commonwealth  Electric,  interest  3oaoo 

August       31. — Mortgage  interest.  South  Chicago 4804JO 

September  30. — Mortgage  interest,  Evanston 660x10 

October       i.— C.  B.  &  Q.  R.  R.,  dividend laaoo 

November   i. — Bank  dividend  and  extra 765-00 

December    2. — Santa   Fe,    interest ' 285.00 

Advances  to  widow  during  the  year,  January  31st,  $250.00;  March 
28th,  $500.00;  July  25th,  $1,500.00. 

Apportion  the  income  by  months  and  write  up  the  following  accounts; 
considering  the  dates  of  payments  to  and  from  as  the  due  dates: 

Cash  account  Son's  account. 

Widow's  account.  Each  daughter's  account 

9.  In  investigating  the  records  and  accounts  of  a  business  on  behalf 
of  a  purchaser  of  a  half  interest,  state  concisely  to  what  points  you  would 
direct  your  special  attention.     (Limit,  150  words.) 

287 


Accountancy  Problems  and  Solutions. 


C,  P.  A.  Examination  Papers. 


\   '^ 


n 


|!' 


ti^ 


ICK   A  client  bought  a  business  for  $17,500.00,  basing  his  action  upon 
the  following  balance  sheet  of  December  31,  1909: 

Assets: 

.jplant   •  > ......•••• •  •  • $4»/ ^O'^ 

Merchandise  inventory 7,385-00 

Accounts  receivable 12,500.00 

Profit  and  loss 2,010.00 


Liabiiities: 

Accounts  fiayable 


$26,605*00 
10,000.00 
$16,605.00 


A  charter  was  obtained  from  the  State  of  Illinois  with  an  authorized 
capital  of  $20,000.00,  the  balance  being  working  capital,  $2,500.00  paid  in. 

Prior  to  opening  up  under  the  new  organization  the  directors  deter- 
mined to  write  off  $1,250.00  from  the  Accounts  Receivable,  $210.00  from 
the  plant  assets,  and  $885.00  from  the  nventory. 

At  the  first  semi-annual  accounting  they  showed  a  loss  from  trading, 
aside  from  a  depreciation  allowance  of  $600.00. 

Assuming  that  all  assets  and  liabilities  remain  as  at  the  start,  subject  to 
the  depreciation  now  allowed,  draw  up  a  Balance  Sheet  as  of  June  30, 

COMMENTS 

About  three  years  ago— in  the  April,  1908,  number— the  editor  of  this 
department  of  the  Jouknal  compared  the  New  York,  Pennsylvania,  and 
English  examination  papers,  pointing  out  the  contrasts  and  differences  in 
standard.  To  the  readers  of  the  Journal,  who  have  followed  the  work  in 
this  department,  it  will  be  of  great  interest  to  notice  the  various  changes 
that  have  taken  place.  In  a  sense,  limited  of  course,  the  examination  papers 
are  somewhat  a  gauge  of  the  professional  standard  prevalent.  In  a 
previous  number  of  the  Journal,  a  part  of  the  New  York  examination 
papers  was  given.*  We  are  therefore  now  in  a  position  to  review  to 
advantage  the  papers  of  the  three  different  states — ^New  York,  Mas- 
sachusetts, and  Illinois. 

The  Massachusetts  paper  on  Practical  Accounting  is  somewhat  on 
the  style  of  the  New  York  paper  in  the  same  subject  It  is  divided  into 
two  parts,  three  questions  being  given  in  each  part,  and  the  candidates 
are  expected  to  answer  two  out  of  the  three  within  three  hours*  time. 
One  session  is  held  in  the  forenoon  from  nine  to  twelve  for  the  first  part 
of  the  paper,  and  an  afternoon  session  of  three  hours  for  the  second  part 
of  the  paper.  Although  the  Massachusetts  paper  is  not  exactly  of  the 
same  calibre  and  standard  as  the  New  York  or  Illinois,  it  must  not  be 
overlooked  that  this  is  only  the  second  examination  and  that  the  board 
is  drawing  upon  the  early  papers  of  the  neighboring  State  Boards  of 
Accountancy.  From  the  trend  of  the  paper,  there  is  no  doubt  that  it 
will  improve  in  quality  with  each  successive  examination. 

The  Illinois  paper,  in  the  same  subject,  is  also  divided  into  two  parts 
with  three  hours*  allowance  to  each  part.  Five  questions  are  given  at 
each  session,  forenoon  and  afternoon,  and  the  candidates  are  expected 


•Part  I.,,  pp..9»*i«o- 


to  answer  all  the  questions.  On  this  basis  the  candidate  is  allowed  an 
average  of  thirty-six  minutes  to  read  each  problem,  gather  the  facts  and 
solve  it.  If  we  consider  that  the  heading  of  the  paper  reads,  "  The  in- 
telligence  indicated  by  answers  will  be  considered  in  marking  the  appli- 
cants, as  well  as  the  technical  accuracy  of  such  answers,"  we  think  that 
it  is  not  fair  to  the  candidates.  No  practitioner,  even  of  exceptional 
ability  and  experience,  could  give  an  intelligent  and  technical  accurate 
answer  to  any  of  the  problems  in  thirty-six  minutes.  The  eighth  problem 
in  the  second  part  of  this  paper  would  require  half  an  hour  in  order  to 
collect  the  facts,  not  to  speak  of  solving  the  problem.  There  is  no  doubt 
that  the  paper  is  of  a  very  high  and  interesting  standard  and  deserves  all 
commendation,  but  why  should  the  candidates  be  required  to  do  impossible 
tasks?  Coming  in  contact  with  the  various  members  of  the  State  Boards, 
we  are  convinced  that  they  are  far  from  intending  to  put  before  the 
candidates  impossibilities,  and  therefore  a  little  consideration  of  the  time 
allowance  when  the  papers  are  made  up,  would  be  of  great  help  to  the 
candidates  and  would  establish  beyond  question  the  fairness  of  the  board 

With  the  exception  of  the  first  problem  in  part  one,  the  New  York 
Paper  on  Practical  Accounting  is  excellent  It  is  very  fair,  containing 
problems  which  the  average  practitioner  has  to  meet  daily;  therefore  the 
aspirant  should  be  familiar  with  them.  If  a  man  has  pursued  a  proper 
course  of  study,  and  not  merely  **  crammed,*'  and  if  he  has  a  little  prac- 
tical experience,  he  can  solve  them,  without  difficulty,  in  the  time  allotted. 
The  first  problem  mentioned  before  is  rather  highly  technical,  and  as  the 
mathematical  accuracy  in  that  particular  instance  is  of  the  utmost  im- 
portance, requiring  verification  and  proof,  it  is  questionable  whether  a 
greater  time  allowance  should  not  be  given  to  such  a  problem. 

When  we  review  the  papers  in  Theory  of  Accounts,  we  find,  regarding 
time  allowance,  that  the  criticism  that  applies  to  the  State  Board  of 
Illinois  in  practical  accounting,  applies  with  equal  if  not  greater  force, 
to  the  State  of  Massachusetts.  There  (in  Massachusetts)  the  candidate 
is  allowed  four  and  one  half  hours  in  which  to  answer  ten  questions  in 
Theory  of  Accounts,  and  six  questions  in  Commercial  Law. 

In  the  first  place  it  is  doubtful  whether  it  is  advisable  to  require  a 
candidate  to  spend  continuously  four  or  four  and  one  lialf  hours  at 
examinations.  In  New  York,  for  instance,  at  the  academic  examinations 
given  by  the  Regents,  the  Board  of  Health  insists  that  an  examinee  be 
not  permitted  to  spend  more  than  five  hours  in  the  examination  room. 
That  we  must  remember  is  not  compulsory,  but  rather  elective.  If  an 
examinee  has  completed  a  paper  in  a  given  subject  before  the  time  allotted, 
he  may,  if  he  chooses  continue  on  another  paper.  The  hour  at  which  he 
began  the  second  paper  is  noted,  and  he  must  stop  when  the  total  number 
of  hours  for  the  two  papers  is  five.  In  the  case  of  Massachusetts,  how- 
ever, the  candidate  is  actually  compelled  to  spend  four  and  one  half  hours, 
unless  he  can  complete  the  two  papers  in  less  time,  which,  of  course,  is  not 
true  of  the  majority. 

It  is  also  questionable  whether  the  six  questions  in  Commercial  Law 

28g 


■ll'^W'PWiill' 


■■III 


Accountancy  Problems  ani  SoluHons. 

arc  aiiikieiit  This  is  especially  important  when  most  of  the  states  require 
ten,  and  on  its  face,  it  would  indicate  that  the  tendency  of  the  Mas- 
sadinacttt  Board  is  to  undervalue  the  importance  of  the  subject.  In  the 
law  questions  before  us,  if  a  man  has  read  something  on  partnerships 
and  corporation^,  and  has  studied  a  few  definitions,  that  would  be  all  that 
is  required  of  him  to  pass  the  examination.  The  paper  in  theory  of 
accounts  in  the  case  of  this  State,  shows  that  the  board  has  also  con- 
sidered general  business  aside  from  "mere  theory."  The  first  question 
deals  rather  with  efficiency  of  business  than  theory  of  accounts,  but  is 
ne¥ertheless  a  very  important  proposition,  and  if  many  more  like  it  were 
given  in  examination  papers,  the  aspirants  would  not  only  be  "  account- 
ants," but  efficient  ones  as  well.  The  paper  in  auditing  is  excellent.  It 
dearly  indicates  that  the  hoard  recognizes  the  responsibility  placed  on 
accoiintants  by  the  recent  bill  regarding  auditing  for  banks. 

The  papers  on  Theory  of  Accounts,  Commercial  Law,  and  Auditing 
given  by  the  Illinois  State  Board,  are  of  a  general  character,  and  indicate 
a  steady  progress  in  the  standard. 

In  the  case  of  the  Mew  York  State  Board  of  Accountancy,  the  board 
has  adopted  an  interesting  procedure  in  connection  with  the  papers  on 
Theory  of  Accounts,  Qimmercial  Law,  and  Auditing.  Each  paper  is 
divided  mto  three  respective  groups,  the  candidates  being  required  to 
answer  some  questions  in  each  group.  The  idea  of  giving  a  number  of 
questions  and  asking  candidates  to  select  two  thirds  of  them,  has  its 
advantages  as  well  as  disadvantages.  By  the  method  adopted  by  the 
New  York  board  at  the  present,  while  the  candidate  still  has  a  choice  of 
questions,  he  is  compelled  to  know  something  about  affairs  in  which 
ordinarily  he  would  not  be  prepared. 

The  New  York  board  is  to  be  congratulated  on  the  new  syllabus  just 
issued  by  the  Education  Department  of  the  University  of  the  State  of 
New  York,  in  the  preparation  of  which  it  undoubtedly  must  have  greatly 
assisted.  The  board  gives  a  complete  outline  of  what  will  be  expected 
from  each  candidate  regarding  the  four  subjects  in  which  he  is  to  he 
caismined,  and  if  he  has  prepared  himself  according  to  this  syllabus,  he 
ought  not  to  have  difficulty  in  passing  the  examination.  An  interesting 
feature  of  this  syllabus  is  its  extensive  bibliography.  The  candidate  for 
cacaminations  has  always  been  groping  in  the  dark  as  to  which  books  he 
should  refer  to  and  consult  in  preparing  for  the  examinations.  In  this 
respect  it  is  quite  a  step  forward.  It  is  of  particular  importance  to  notice 
that  in  the  bibliography  are  included  books  which  are  not  strictly  on 
accounting,  but  which  are  of  great  importance  to  the  practitioner;  such 
as,  "Anatomy  of  a  Railroad  Report,"  by  Woodlock;  "Financing  an 
Enterprise,"  %  Cooper;  "Funds  and  Their  Uses,"  by  Cleveland;  "His- 
tory of  Modem  Banks  of  Issue,"  by  Conant 

The  three  papers,  as  a  whole,  if  compared  with  the  papers  ol  a  few 
fears  ago,  tend  to  convince  even  the  most  pessimistic  that  the  influx 
to  the  accounting  profession  is  bound  to  be  a  healthy  one,  benefiting  the 
profeisioii  at  large  and  placing  credit  and  dignity  upon  the  Certified  Pub- 

290 


C.  p.  A.  Examination  Papers. 

New  Jersey  C  P.  A,  Examinations    1904-1909. 

Theory  of  Accounts. 

1.  State  briefly  your  view  as  to 

a.  Single  Entry  System  of  Keeping  Accounts. 

b.  Double  Entry  System  of  Keeping  Accounts. 

2.  Accounts. 

a.  What  is  an  Account? 

b.  What  is  a  Real  Account? 

c.  What  is  a  Representative  Account? 

d.  What  is  the  purpose  of  Controlling  Accounts? 

e.  When   one   Controlling  Account  only  is   used,   what   would  you 

call  it? 

f.  When  two  or  more  are  used,  name  two. 

g.  Cash  Account.    In  what  manner  does  it  differ  from  other  Real 

Accounts  ? 
h.  Bills  Receivable  and  Bills  Payable.     Of  what  use  are  they,  and 
how  kept  so  that  they  may  be  intelligible? 
Define  and  state  the  uses  of  the  following  Accounts : 
i.  Capital. 
j.  Revenue. 

k.  Trading  (or  Merchandise). 
1.  Loss  and  Gain, 
m.  Surplus, 
n.  Deficiency. 

3.  Trial  Balance. 

a.  Describe  the  same,  and  its  uses. 

b.  Do  you  consider  its  use  necessary? 

4.  Balance  Sheet. 

a.  Wherein  does  it  differ  from  the  trial  balance? 

b.  Is  the  trial  balance  essential  to  the  making  of  the  balance  sheet, 

and  if  so,  why?    And  if  not,  why  not? 

c.  Assuming  that  there  is  more  than  one  form  of  balance  sheet,  name 

those  that  you  know  of,  and  state  wherein  they  differ  from  each 
other. 

d.  State  on  which  side  the  assets  should  be  shown;  also  which  side 

the  liabilities  should  be  shown,  and  state  if  the  same  rule  applies 
to  all  forms  of  balance  sheets,  and  if  not,  why  not? 

5.  Assets. 

a.  Define  same  in  general  terms. 

b.  Name  two  kinds. 

c.  Define  the  first  one  that  you  have  named. 

d.  Define  the  second  one  that  you  have  named. 

e.  Bad  or  doubtful  (accounts)— how  should  they  be  treated  at  the 

close  of  a  fiscal  period? 

291 


i 


.: 


J     ' 


I 


i 

t 

! 

) 

1 

■"  i 

1 

1 

I 

( 

1 

^{lliix 


Accountancy  Problems  and  Solutions. 

6.  Liabilities. 

t.  Define  same  in  general  terms. 

b.  Name  two  permanent  or  fixed  liabilities. 

c  What  is  a  contingent  liability? 

d.  Name  one. 

7.  Fixed  Charges.    Operating  Expenses. 

a.  Define  fixed  charges,  and  name  three  kinds. 

b.  Define  operating  expenses,  and  name  three  kinds. 

8.  Debit 

a.  Define  same  in  general  terms. 

b.  Why  is  the  word  To  used  in  connection  therewith,  and  is  its  use 

necessary? 

9>    Credit. 

a.  Define  same  in  general  terms. 

b.  Why  is  the  word  By  used  in  connection  therewith,  and  is  its  use 

necessary? 

la    State  your  opinion  briefly  as  to  the  merits  or  the  demerits  of 

a.  Bound  books  of  account. 

b.  Loose  leaf  books  of  account. 

c  Special  rulings  in  books  of  account. 

d.  Private  ledger. 

e.  General  ledger. 

f.  Card  ledgers. 

g.  The  journal;  do  you  consider  its  use  necessary? 


Practical  Accounting. 

I.  A  certain  concern,  consisting  of  two  partners — Mr.  A.  and  Mr. 
B. — ^have  been  doing  business  for  several  years,  keeping  their  books  by 
Single  Entry.  At  the  close  of  a  certain  fiscal  period — say  July  i,  1904 — 
it  was  found  that  the  business  was  worth,  or  that  the  net  investment  was, 
|l8k548.03.  At  this  time  the  owners  (Mr.  A.  and  Mr.  B.)  concluded  to 
0§er  the  business  for  sale;  also  to  continue  the  business  until  such  time 
as  a  purchaser  may  be  found. 

It  is  not  known  what  the  specific  interest  of  each  partner  is.  After 
failure  to  find  a  purchaser  who  would  take  over  the  entire  business,  Mr. 
A.  sold  his  entire  undivided  interest  to  Mr.  C,  and  Mr.  B.  sold  his  entire 
undivided  interest  to  Mr.  D.,  and  it  is  not  known  "how  much"  Mr.  A. 
received  from  Mr.  C,  nor  is  it  known  "  how  much  "  Mr.  B.  received  from 
Air.  u. 

Messrs.  C.  and  D.,  the  purchasers,  "  came  together,"  and  mutually  agreed 
to  become  co-partners  and  carry  on  the  business,  each  on  an  equal  basis, 
as  to  ownership,  and  also  as  to  the  sharing  of  losses  or  gains. 

292 


C.  p.  A.  Examination  Papers, 

Messrs.  C  and  D.  "  took  possession "  on  August  i,  1904,  and  the  book- 
keeper, on  being  requested  to  show  "how  the  business  stood"  on  that 
date,  handed  Messrs.  C.  and  D.  the  following,  which  he  (the  bookkeeper) 
called  a  financial  statement : 

Bookkeeper's  Statement. 

Value  of  Real  Estate  and  Buildings $25,000.00 

Value  Plant,  Machinery,  Fixtures,  etc St^SST^ 

Prudential  Insurance  Company- 
First   Mortgage   $io,ooaoo 

Accrued  Interest   125.00 

I0^I2S00 

Samuel  Sloane — 

Second  Mortgage $3,000.00 

Accrued  Interest  56.25 

3.056^5 

William  Wilson- 
Third   Mortgage    $3,000.00 

Accrued  Interest  56-25 

3.056.25 

Metal   Merchandise,   per   Inventory 6,37775 

Wood  Merchandise,  per  Inventory 1,916.28 

Stable  Supplies,  per  Inventory 10.00 

Cash  198.28 

Sundry  Customers  owe  to  Messrs.  A.  and  B 7,607.70 

Value  Horses,  Trucks,  Harness,  etc 1.475-00 

Our  Notes  Outstanding  amount  to 5.752-32 

Messrs.  A.  and  B.  owe  on  Open  Account  to  Sundry 

Creditors    3,6i5X« 


$73475.60 

Messrs.  C.  and  D.  are  satisfied  as  to  the  items  and  the  amounts  in  the 
foregoing  "statement,"  but  they  desire  to  have  the  matter  "put  in"  m 
clear,  concise  form,  so  that  a  new  set  of  books  may  be  opened  and  started. 
Double  Entry.    They  wish  to  have  and  to  know: 

First.    The  assets. 

a.  Properly  classed. 

b.  Amount  of  each  class  (or  debtor), 
c  Gross  amount. 

Second.    The  liabilities. 

a.  Properly  classed. 

b.  Amount  of  each  class  (or  creditor). 

c.  Gross  amount 
Third.    Investment. 

a.  Each  partner. 

b.  Total  investment. 


^w 


I 


'If 


1 ' 

1  i 

i  w 

1  t 

AccGunlancy  Problems  and  Solutions. 

Fourth.    Between  July  ist  and  August  ist  had  the  business  been  run  at 
a  'OSS  or  a  gam,  and  how  much  in  either  case? 

Prepare  a  financial  statement,  such 


as  you  consider  will  meet  the 


qnircments  of  Messrs.  C  and  D  and  that  will  *.«oK1o  fi,  u     ^, 

mew  books  on  double  entry  plans.  ^ 

Add  to  your  financial  statement  a  proper  certificate  and  sign  the  same 
JOHN  DoiL    Number  (Here  put  your  own  number). 
2.    Trial  Balance. 

^Messrs.  C  &  D.  at  the  close  of  business  on  August  31,  1904: 


I. 

3. 
6. 

Oh 

la 


Mr.  C.  .... 

Mr.  D 

Real  Estate 


and  Buildings $25,000.00 

mery.  Fixtures 

J.  rucKs  ••«.,,,, 


$ii,iaa96 
11,128.9s 


39- 


Plant,  Michmciy,  Fixtures,  etc. 5^.  ^ 

Horses  and  Trucks....  S^aeST^ 

Cash  M75.00 

Metal  Merchandise  ...V.***.'.'.''.*.'.' -^^-^^^ 

Wood  Merchandise  ......'.* 

Bills  Receivable-Notes   .  .V.V.V.V..*  .*  ]  .* 

ja    Miiuigcfiient  (Salaries,  etc)..  

34.    Rent,  Heat,  Light,  Power 

Factory  Expense ..[...'.'.''].*'.'.*.T  "' 

Umce  Expense   

5>table  Expense  

Insurance   , '  *  * 

56.    Interest  ., '^^ 

58.    Discounts  for  Cash  Payments.**] ' 

^    Prudential  Ins.  Ca,  Mortgagee....*; ** 

%    Samuel  Sloane,  Mortgagee * ' " 

%    William  Wilson,  Mortgagee 

6S.    Bills  Payable— Notes    ... 

7a    Sales  of  Metal  Goods......*.*."  " 

7^.    Sales  of  Wood  Gkwds. 

Accounts  Receivable,  Customers;;*.*.'.;;.*.*;;;;;; 
Accounts  Payable,  Creditors.... 


4a 

52. 


7,507^62 

3,951.10 

162.86 

963.50 

118.40 

83.78 
164.09 
270.03 
745.23 

38.84 
184.31 


7,276.89 


10,125.00 
3,056.25 
3,056.25 
7,045.57 

3,353.94 
2400.29 

3,788.06 


Iiiiriento:ry  Shows— 

Metal  Merchandise  on  Hand.... 
Wood  Merchandise  on  Hand.... 

Coal  on  Hand ][[' 

Office  Supplies  on  Hand ;;* 

Siiblc  Supplies  on  Hand..... .., 

laiurance,  Unexpired  Premiums! 


$55,083.27    $55,083.27 


$6,000.00 

4,000.00 

50.00 

25.00 

25.00 

500.00 


Total 


$10,600.00 


294, 


C.  P.  A.  Examination  Papers, 

From  the  foregoing  trial  balance  prepare : 

1.  Balance  sheets. 

a.  Working  paper  form. 

b.  Continental  or  technical  or  report  form. 

c.  Show  net  gain  or  loss  for  August,  1904. 

d.  Show  each  partner's  share  of  the  loss  or  gain. 

e.  Show  each  partner's  investment. 

f.  Show  total  investment  or  capital. 

2.  Loss  and  gain  statement. 

3.  Financial  Statement,  after  closing  books. 

4.  Recapitulation,  showing: 

a.  Mr.  C's  investment,  before  closing  books. 

b.  Mr.  C's  share  of  the  loss  or  gain. 

c.  Mr.  C's  investment,  on  September  i,  1904, 

d.  Mr.  D.'s  investment,  before  closing  books. 

e.  Mr.  D.'s  share  of  the  loss  or  gain. 

f.  Mr.  D.'s  investment,  on  September  i,  1904. 

g.  Net  gain  or  loss  for  August,  1904. 

h.  Amount  of  capital  invested  in  the  business  on  September  i, 
1904. 

3.  Messrs.  C  and  D.  desire  that  their  ledger  shall  show  all  the  transac- 
tions with  their  creditors — i.  e.,  purchases  and  payments  with  each 
creditor. 

Naturally,  the  bookkeeper  wishes  to  so  arrange  his  books  as  to  accom- 
plish the  desired  end  with  the  minimum  of  labor. 

a.  What  would  you  recommend?     (Use  as  a  basis  foregoing  trial 

balance.) 

b.  What  would  you  name  your  plan? 

c.  What  general  instructions  would  you  give  to  the  bookkeeper  to 

enable  him  to  properly  maintain  your  "plan"  after  its  installa- 
tion by  you? 

4.  How  would  you  arrange  or  prepare  a  special  cash  book  for  this 
same  business  or  concern  to  reduce  labor,  but  in  no  way  impair  efficiency  ? 

a.  Illustrate  the  arrangement  of  the  debit  side. 

b.  Illustrate  the  arrangement  of  the  credit  side. 

c  Give  general  instructions  as  to  "  keeping  "  and  as  to  "  dosing  *'  the 
same. 

5.  Messrs.  C  and  D.,  finding  the  business  profitable,  and  wishing  to 
extend  or  increase  the  business,  are  compelled  to  procure  additional  cap- 
ital. Three  of  their  friends— Messrs.  E.,  F.  and  G.— stand  ready  to  sup- 
ply the  money,  but  suggest  incorporating  under  the  laws  of  New  Jersey, 
which  suggestion  is  agreed  to,  and  on  the  following  basis : 

E.,  F.  and  G.  agree  to  organize  and  incorporate  a  joint  stock  company, 
at  their  own  expense,  capital  $100,000,  and  buy  the  entire  business  from 
C.  and  D. 
191a 

■•513 


J  ll 


I      I 


Accmnimcy  Problems  and  Solutions. 

Capital  $icx»,ooo,  i,ooo  shares,  par  value  $ioo,  full  paid  and  non- 
assessable. 

C  to  have  lor  liis  interest  in  the  business 150  shares.  $15,000 

B.  to  have  for  his  interest  in  the  business .150  shares.  15,000 

E.  to  purchase  for  cash  at  par 150  shares.  15,000 

F.  to  purchase  for  cash  at  par 150  shares.  15,000 

G.  to  purchase  for  cash  at  par 150  shares.  15,000 

All  agree  there  shall  be  treasury  stock 250  shares.  25,000 

Pull  paid  and  non-assessable,  which  at  any  time  may  be  sold  to  procure 
additional  working  capital. 

As  soon  as  the  company  begins  business  (the  incorporators  and  Messrs. 
C  and  D.  having  so  agreed  previously)  intend  to  and  do  pay  on  Septem- 
ber I,  1904,  the  mortgages,  the  mortgagees  each  for  himself  having  agreed 
to  the  arrangement 

The  cost  of  incorporating  the  company  amounted  to  $500.00. 

All  preliminary  arrangements  were  made  prior  to,  and  the  company 
came  into  existence  on,  September  i,  1904.  The  company  immediately 
paid  off  the  mortgages,  opened  a  new  set  of  books,  using  the  same  values 
as  per  C  &  D.'s  financial  statement  of  September  i,  1904. 

a.  Prepare  a  financial  statement  which  will  show  the  condition  of  the 

company  before  "  starting  in  to  do  business,"  but  taking  into  ac- 
count the  transaction  of  payment  of  mortgages. 

b.  How  was  the  full  capital  stock  made  "  full  paid  and  non-asse»- 

sable**? 

c.  In  what  manner  is  the  $25,000  converted  into  treasury  stock? 

d.  Why  has  good  will  account  been  opened  ? 

c.  Prepare  a  list  of  stockholders,  showing  holdings  of  each. 

6.  Statements. 

a.  Name  four  kinds, 

b.  Briefly  define  the  first  one  that  you  have  named. 

c.  Briefly  define  the  second  one  that  you  have  named. 

d.  Briefly  define  the  third  one  that  you  have  named. 

e.  Briefly  define  the  fourth  one  that  you  have  named. 

7.  .Ledger. 

You  wish  to  so  keep  your  accounts  that  at  any  given  time  you  may 
readily  ascertain  the  aggregate  balances  due  from  your  customers  and  the 
aggregate  balances  due  to  your  creditors,  without  taking  the  time  to  list 
the  same  (customers  and  creditors),  and  at  the  same  time  you  wish  to 
maintain  your  ledger  in  perfect  balance. 

a.  How  would  you  arrange  your  ledger  or  ledgers? 
k  How  would  you  name  the  ledger  or  ledgers? 
c  How  would  you  maintain  the  balance  of  the  ledgers  or  make  it 
possible  to  balance  or  prove  one  ledger  independent  of  the  other 
ledgers? 


C.  P.  A.  Examination  Papers. 

8.  Analysis  of  a  Ledger. 

a.  Give  two  reasons  why  the  making  of  an  anlysis  of  a  ledger  becomes 

necessary. 

b.  State  briefly  how  you  would  proceed  to  make  an  analysis  of  a 

ledger. 

9.  Banking. 

a.  You  have  received  and  deposited  a  check  in  your  bank.    Briefly  de- 

scribe its  course  through  your  bank  and  to  its  "  home  bank,"  and 
thence  to  the  drawer  or  maker  of  the  check.  Assume  the  check  to 
be  drawn  on  The  Chemical  National  Bank  of  New  York,  but 
sent  by  your  bank  to  the  American  Exchange  National  Bank,  the 
American  Exchange  being  the  New  York  correspondent  of  your 
bank. 

b.  What  is  the  purpose  of  the  discount  tickler? 

c.  What  is  the  purpose  of  the  collection  tickler? 

10.  Commercial  Arithmetic. 

a.  Define  equation  or  averaging  of  accounts. 

b.  What  is  the  equated  time  for  the  payment  of  the  balance  of  the 

following  account  (30  days  to  the  month  and  6%  per  annum)  ? 

Dr.                                 Henry  M.  Doremus.  Cr. 

1904. 

Mar.  16.  Mdse.  4  months..  $444-57  I904' 

Mar.  30.  Mdse.  60   days...     376.82      July      i.  Cash $400.00 

Apr.   20.  Mdse.   30  days. . .     712.19      July    20.  Cash 37S-<» 

May   17.  Mdse.  4  months..    628.75      Aug.   16.  Cash 700.00 

May  28.  Mdse.  4  months..    419.31      Aug.  30.  Cash 600.00 

c.  Henry  M.  Doremus  desires  to  settle  the  above  account  on  Sep- 

tember 13,  1904.    What  amount  of  money  shall  he  pay? 

11.  Building  and  Loan  Companies. 

a.  State  briefly  the  primary  objects  of  building  and  loan  companies. 

b.  What  protection  does  the  State  afford  to  such  companies? 

c.  To  whom  are  the  funds  of  building  and  loan  companies  loaned  ? 

d.  Is  it  customary  and  necessary  to  keep  an  independent  ledger  ac- 

count with  each  member,  showing  his  payments  of  dues,  etc.,  and 
dividends,  etc.?    And  if  not,  why  not? 


Commercial  Law. 

I.    Contracts. 

a.  Name  the  primary  elements  of  a  contract. 

b.  What  is  a  valuable  consideration? 

c.  How  many  parties  are  necessary  to  the  making  of  a  contract? 


296 


297 


Accountancy  Problems  and  Solutions. 


C.  P.  A.  Examination  Papers. 


IP 


1   : 1 


f 


2.  Partnership. 

a.  Who  may  become  partners? 

k  What  is  a  partnership,  and  how  formed?  .  ^ 

c.  Profit  and  Loss.    In  case  of  no  specific  agreement  as  to  division, 
how  would  the  same  be  divided  as  between  partners? 

3.  Corporations. 

a.  What  is  a  corporation? 

k  Name  the  parties  to  a  corporation. 

c.  What  is  a  franchise? 

d.  State  briefly  how  you  would  proceed  to  orgamze  a  corporation  in 

the  State  of  New  Jersey. 

4.  Interest  and  Discount. 
a.  What  is  interest? 

k  What  is  discount? 

5.  Insurance. 

Define  same  in  general  terms. 

6.  Distribution  of  Estates  of  Persons  Deceased, 
a.  What  is  a  will? 

k  How  many  kinds  of  wills  are  there? 
c  Name  two  kinds. 

4  What  constitutes  the  probate  of  a  will  ? 

e.  Where  there  is  no  will,  how  is  the  estate  of  the  deceased  cared  for 
and  distributed? 

7.    Legal  Terms.    Define  the  following: 
a.  Acceptance, 
k  Accommodation  Paper. 

c.  Adjudication. 

d.  Alteration. 

e.  Attorney  in  Fact 

f.  Blank  Endorsement. 

g.  Escrow. 

k  Ultra  Vires. 

a    How  can  interest  be  calculated  on  a  sealed  note  in  the  following 

words  ? 

I  promise  to  pay  to  A.  B.  or  his  assignee  one  thousand  dollars,  for 

value  received,  and  to  pay  interest  annually. 

The  note  is  not  paid  for  five  years.    Does  the  interest,  which  is  to  be 
paid  annually,  become  principal  and  bear  interest? 

9.    What  is  a  Receiver?—:,  e.,  define  the  same. 

298 


10.    Miscellaneous. 
a.  What  makes  a  note  or  draft  negotiable? 
k  Is  it  necessary  under  all  circumstances  to  protest  a  note  or  draft 

if  not  paid  when  due? 
c  What  is  gained,  if  there  is  any  gain,  by  protesting  notes,  etc.? 
d.  Can  a  building  and  loan  company  (of  N.  J.)  borrow  money?    And 

if  so,  how? 
c  What  is  the  legal  rate  of  interest  in  New  Jersey? 


Auditing. 

1.  The  general  business  public  frequently  make  no  distinction  as  be- 
tween a  bookkeeper  and  an  accountant    What  is  the  distinction?    Define 

in  your  own  words : 
a.  A  bookkeeper. 
k  An  accountant 

c.  An  auditor. 

d.  A  practicing  public  accountant  and  auditor. 

2.  A  business  man  sends  for  you  and  talks  to  you  thus :  "  I  want  my 
books  and  accounts  examined.  I  am  informed  and  believe  them  to  be  all 
right,  but  I  want  to  be  assured  of  it  beyond  doubt  I  also  want  to  know 
the  condition  of  my  business,  as  the  books  show  the  same,  at  this  date, 
I  also  want  to  know  if  the  business  has  made  money  or  lost  money,  and 
in  either  case  what  amount  What  will  the  "  job  "  cost  me,  and  how  long 
will  it  take  to  find  out?  '* 

a.  How  would  you  deal  with  such  a  case? 

b.What  would  you  require  to  have  furnished  to  you  so  that  you  could 
ascertain  the  facts  wanted? 

3.  Good  will. 

a.  What  is  good  will? 

b.  What  part  does  it  play  in  corporations  ? 

4.  Partnership  Settlement. 

Three  gentlemen  have  been  associated  as  partners  in  a  certain  manu- 
fiacturing  enterprise.  At  the  close  of  the  year  they  desire  an  honest  and 
fair  adjustment  of  the  result  and  division  of  the  resulting  gains.  They 
liave  agreed  to  abide  by  your  decision.  They  furnish  you  the  following 
liacts: 

1.  Anderson,  Brown  &  Cristy  are  equal  partners  in  a  manufactttring 

enterprise. 

2.  Each  partner  to  receive  6%  interest  on  his  average  investment 

3.  Christy,  as  superintendent,  to  receive  yearly  salary  of  $3,000. 

299 


\\       ^ 


I"' 


I 


i'"' 


i 


Accountancy  Problems  and  Solutions. 

4.  Brown  keeps  a  general  store,  at  which  the  operatives  deal,  and 

Brown  has  agreed  to  allow  Anderson  and  Cristy  5%  on  his  sakt 
to  the  operatives. 

5.  Brown's  sales  to  the  operatives  amounted  to  $1,575. 

6.  Anderson  to  receive  for  his  services  as  selling  agent  10%  on  the 

net  profits  as  existing  before  his  percentage  is  taken. 

7.  Anderson's  average  investment  for  the  year  is  $9,75a 

8.  Brown's  average  investment  for  the  year  is  $5,750. 

9.  Cristy's  average  investment  for  the  year  is  $5,000. 

10.  Leaving  out  the  interest,  salary  and  Anderson's  and  Cristy's  per- 
centages, the  net  gain  for  the  year  is  $15,000. 
What  share  of  the  $15,000  is  each  partner  entitled  to? 
Prepare  a  sheet  that  will  show  under  separate  heads : 
Accounts,  with  items,  of  Anderson,  Brown,  Cristy.     Distribution  of 
the  gain. 

5.  a.  How  would  you  "treat  and  proceed"  in  an  examination  of  ac- 
counts receivable  as  to  classing  same  as  good,  doubtful,  and  bad? 

b.  What  books  and  papers  would  you  demand,  and  how  would  you 
"treat"  the  same,  were  you  called  in  to  make  a  first  audit? 

c.  How  would  you  proceed  if  called  in  to  make  a  second  or  later  audft 
of  the  same  books,  etc.  ? 

6.  How  would  you  "treat"  such  accounts  as  the  following,  if  closing 
the  books  at  a  certain  period,  with  a  view  to  ascertaining  the  loss  or  gaia? 

a.  Insurance  premiums  paid  in  advance, 

b.  Real  estate,  as  to  taxes,  assessments,  etc. 

c.  Mortgages,  notes  and  other  paper  as  to  interest. 

7.  What  is  your  idea  of  the  proper  and  a  just  charge  or  compcnsa- 
tion,  just  as 

a.  To  the  employer  and  the  employee,  for  rour  services  as  a  certified 

public  accountant? 

b.  The  services  of  a  first  assistant? 

c.  Other  assistants? 

a    State  briefly  how  you  would  proceed  if  called  in  to  audit  and  render 
a  financial  statement  of 

a.  A  national  or  State  bank  of  deposit  and  discount 
k  A  savings  bank. 

c.  A  building  and  loan  association. 

d.  An  insurance  company. 

e.  A  mercantile  or  manufacturing  business  (partnership). 

f.  A  corporation. 

9.    a.  As  a  certified  public  accountant  and  auditor,  what  would  be  your 
relation  with  your  client? 

b.  To  what  extent  do  you  consider  that  you  should  hold  yourself 
sponsible  for  your  work  as  an  accountant  and  auditor? 


'M 


f  C.  P.  A,  Examination  Papers, 

10.  a.  Write  such  a  certificate  as  you  would  consider  proper  where  all 
the  facts  and  figures  were  at  your  command  and  where  you  had  in  no 
way  been  hampered  in  your  work. 

b.  A  certificate,  where  certain  facts  had  been  furnished  to  you  with  m 
ftatement  that  the  certain  facts  were  satisfactory  to  all  parties  concerned, 
and  the  balance  of  facts  or  information  you  had  "  gleaned  "  for  yourself. 

c  Write  up  a  letter  of  introduction  to  be  signed  by  your  client  of  New 
York,  who  has  charge  of  a  large  mercantile  establishment.  One  of  his 
derks,  a  man  of  excellent  character  and  ability,  is  about  to  leave  him  for 
California.  He  desires  a  general  letter  of  introduction.  Write  a  letter 
which  shall  be  specific  as  to  his  qualifications,  and  general  in  its  appeal 


ill 


t 


i  * 


Accountancy  Problems  and  Solutions. 

ic  State  Board  of  Acxountancy  of  Washington. 

Exaimnatioii  Questions. 
AugiMl  6,  7  and  8.  1908. 

ExiiACT  FROM  Rules  of  the  Board:— 

Rule  io-"  The  Board  will  grant  certificates  only  to  those  applicanti 
...  who  shall  correctly  answer  at  least  75  per  cent,  of  aU  the  questiom 
on  each  and  every  subject  of  examination/ 


iTieoiy  of  Accounts, 
numcky,  August  6—9  A  M.  to  12.30  P.  M. 

Answer  Six  Questions. 

1.  (a)  Define  Gross  Profit. 

(b)  Define  Net  Profit. 

(c)  Without  using  figures,  draft  a  profit  and  loss  account  in  whkb 
gross  profits  are  distinguished  from  net  profits. 

2.  What  general  principles  should  be  observed  in  differentiating  be- 
tween capital  and  revenue  expenditure? 

3.  A  corporation  having  acquired  a  manufacturing  plant,  discards, 
shortly  after  its  acquisition,  a  large  portion  of  the  machinery  and  replaces 
It  by  machmery  of  a  more  modem  type,  (a)  What  do  you  consider  is 
the  correct  method  of  dealing  on  the  books  with  the  book  value  of  the 
discarded  machinery?  (b)  Do  you  consider  that  it  would  be  proper  for 
the  corporation  to  pay  dividends  until  the  book  value  of  the  discarded 
machinery  had  been  written  off  out  of  profits?  Give  full  reasons  for  your 
iinswers. 

4  (a)  Arrange  a  plan  for  keeping  a  private  ledger  with  which  the 
general  ledger  will  agree  and  yet  in  no  way  reveal  the  contents  of  the 
private  ledger. 

(b)  What  matters  arc  usually  recorded  in  the  private  ledger? 

S.    Describe  the  nature  of  the  following  accounts: 

Consignment. 
Trading. 
Suspense. 
Construction. 

Subscription.  9 


C.  P.  A,  Examination  Papers. 

6.  (a)  What  should  be  done  regarding  the  books  on  the  admission  of 
a  new  partner  into  a  firm? 

(b)  What  entry  or  entries  should  be  made  (i)  when  cash  is  invested 
in  the  business  by  an  incoming  partner?  (2)  When  a  specified  amount  is 
paid  by  an  incoming  partner  to  the  old  members  personally  for  a  share 
in  the  business? 

7.  What  should  be  the  procedure  in  ascertaining  the  value  of  stock  on 
hand  at  the  time  of  a  fire,  the  financial  books  being  intact  and  showing  an 
inventory  taken  four  months  before  the  fire?  Without  using  figures, 
draft  a  statement  in  the  form  you  would  consider  most  suitable  for  setting 
forth  your  findings. 

8.  After  appraisement,  a  manufacturing  corporation  increases  the  book 
value  of  its  real  estate  to  the  appraised  figure,  carrying  the  amount  of  the 
appreciation  to  undivided  profits  account.  Shortly  afterwards  the  corpora- 
tion declares  a  dividend,  to  pay  which  a  part  of  the  real  estate  apprecia- 
tion is  required.  Do  you  consider  that  the  corporation  is  justified  in  treat- 
ing appreciation  of  real  estate  as  an  earned  profit  (assuming  the  real 
estate  to  be  used  for  the  purpose  of  the  business)  and  in  paying  that  ap- 
preciation out  as  dividend?    State  fully  reasons  for  your  answer. 


Practical  Accounting — Part  I. 

Thursday.  August  6—2  P.  M.  to  5.30  P.  M. 

Answer  Two  Questions. 

Notice  to  Candidates: 

The  board  has  decided,  in  connection  with  the  practical  accounting  pa- 
pers set  at  the  present  examination,  that  correct  answers  to  66  2-3  per 
cent  (or  two  out  of  three)  of  the  questions  asked  will  constitute  a  pass. 

I.  A.  &  B.  were  partners  trading  under  the  name  of  A.,  B.  &  Co.  June 
30,  1908,  the  following  balances  appear  on  their  ledger: 

A.,  Capital  Account $70gOOO 

B.,  Capital  Account 50,000 

Real  Estate 22,000 

Buildings    20.000 

Machinery  and  Tools 44,000 

Furniture  and  Fixtures 2,000 

Accounts  Receivable 50,000 

Cash  7,000 

Materials  and  Merchandise 53^)00 

Accounts  Payable   35,ooo 

Bills  Payable   48,000 

Bills   Receivable    5,000 

303 


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I 

hi 


Accomiamcy  Problems  and  Solutions. 

On  Jtine  30,  1908,  tlie  business  is  incorporated  as  the  X.  Company,  on 
me  following  plan : 

1.  Capital  stock  $150,000. 

2.  X.  Company  takes  over  entire  assets  and  liabilities  of  A.,  B  &  Q> 
mt  the  book  figures  as  above,  except  (a)  real  estate  of  the  book  value  of 
ISOOO,  which  is  retained  by  A..  B.  &  Co.;  (b)  the  accounts  receivable. 
Which  arc  taken  over  at  $48,000,  and  (c)  the  capital  accounts  of  the 

pirtners. 

3.  X.  Company  pay  A.,  B.  &  Co.  $30,000  for  the  good  will  of  the  busi- 


4.  Payments  to  A-,  B.  &  Co.  are  made  as  follows :  viz.,  $50,000  in  ist 
mortgage  bonds,  and  the  balance  in  capital  stock  of  the  X.  Company. 

5.  After  paying  off  A.,  B.  &  Co.  the  remainder  of  the  capital  stock  is 
lold  for  cash  to  sundry  persons. 

The  real  estate  which  is  retained  by  A.,  B.  &  Co.  is  bought  from  A.,  B. 
&  Co.  by  A.  for  $7,000  and  is  to  be  charged  to  A.'s  capital  account. 

After  the  completion  of  the  foregoing  described  transactions  A.  &  B 
dittolve  pannershtp. 

You  are  required: 

(a)  To  prepare  closing  entries  for  the  books  of  A.,  B.  &  Co. 

(b)  A  statement  setting  forth  the  partners'  accounts  down  to  their 
final  closing,  beginning  with  the  balances  shown  by  the  books  on  June 
30,  1908. 

(c)  Opening  entries  for  tlie  X  Company. 

a.    Smith,  Brown  and  |imc8  tgree  to  join  in  partnership  for  the  pur- 
pose of  working  a  patent    The  patent  is  the  property  of  Jones. 

Smith  puts  into  the  business  in  cash  $10,000,  and  Brown  $15,000.  Jones 
ill  no  cash  capital,  but  his  patent  and  machinery  are  taken  in  as  the 
«#iivalent  of  $7,500.  and  $2,500,  respectively,  and  are  credited  to  his  cap- 
ital account  accordingly.  The  life  of  the  machinery  is  estimated  at  ten 
fWiTs,  and  the  patent  has  fifteen  years  to  run.  Half  of  the  annual  de- 
preciation on  the  patent  and  machinery  is  to  be  charged  against  Jones' 
towing  account.  Jones  is  to  draw  $100  per  month  as  manager  of  the 
Msiness,  and  is  to  have  one-third  of  the  net  profits  (subject  to  deprccia- 
^m  as  above),  the  remainder  of  the  net  profits  to  go  two-fifths  to  Smith 
■ad  three-fifths  to  BrO'Wn. 

The  profits  (before  charging  management  salary  and  depreciation  on 
machmery  and  patents),  and  the  drawings,  are  as  follows: 

m^ri,  ^^        '907        1908 

i™    ,    •  • $7»Soo   $10,000    $2aooo 

Bwwmgs  by  Smith ,^         ^y,       ,^ 

ipiwwings  oy  isrown  ..••,,,,,,,,,,, , i|500       1,000       1.240 

llwwings  by  Jones  (in  excess  of  salary  and  be- 
fore charging  him  with  depreciation) 500         400  450 

WgaM 


C,  p.  A.  Examination  Papers. 

You  are  required  to 

(a)  Prepare  final  profit  for  each  year,  showing  distribution  of  net 
profits  to  the  partners. 

(b)  Prepare  capital  accounts  of  the  partners  for  each  year. 

(c)  Prepare  patent  and  machinery  accounts  for  each  year. 

Note.— In  answering  this  question  it  is  not  necessary  to  show  journal 
entries.    Interest  on  capital  is  not  to  be  considered. 

3.  The  firm  of  C.  &  D.  carry  on  business  as  dry  goods  merchants  at 
Seattle  and  Tacoma,  and  decide  to  dissolve  partnership  on  Dec.  31,  1907. 
At  that  date  their  balance  sheet  was  as  follows : 

Assets. 

Cash  $!<»•«> 

Merchandise — 

At  Seattle $12,000 

At  Tacoma 7»2SO 

19,250.00 

Accounts  Receivable 17,000.00 

Furniture  and  Fixtures — 

At  Seattle $ii700 

At  Tacoma MOO 

2,800.00 

Good  Will 3,000.00 

$42,150.00 

Liabilities. 

Overdraft $1,050.00 

Accounts    Payable 11,100.00 

C's  Capital 20,000.00 

D.'s   Capital 10,000.00 

$42,IS0X» 

The  partners  divide  in  proportion  to  their  respective  capital  investment, 
and  agree  that  at  the  date  of  dissolution  C  shall  take  over  the  merchan- 
dise and  furniture  at  Seattle,  and  D.  the  merchandise  and  furniture  at 
Tacoma,  at  the  values  shown  in  the  above  balance  sheet.  The  accounts 
receivable  realize  $16,000,  and  all  the  liabilities  are  paid  less  $300  discount 
on  accounts  payable. 

The  realization  is  completed  by  June  30,  1908,  and  you  are  required  to 
continue  all  the  accounts  appearing  in  the  balance  sheet  up  to  and  includ- 
ing that  date,  and  to  show  the  final  closing  of  the  accounts  (including 
those  of  the  partners). 


30s 


■Hilllllll 


^% iliiM^^^^^^^^^        liilHli 

uliliiJ  III  ill        Ji     tmi    li  ml 


i 


Accomimcy  Problems  and  Solutions, 

Pmdicti  Accountiiig — ^Pait  11. 
Flaky,  Augmt  7—9  A.  M.  to  12.30.  P.  M. 

i< 

Answer  Twa  Questions. 
Motice  to  Candidates: 

^^^J^^  **'''**'*^'  "  connection  with  the  practical  accounting  pa- 
peri  Ml  at  the  present  examination,  that  correct  answers  to  66  2-^  ^r 
cent  (or  two  out  of  three)  of  the  questions  will  constitute  a  pass. 

4  The  following  balance  sheets  of  the  firm  of  X.  &  Y.  are  submitted 
to  you  for  investigation  and  criticism  by  a  client  who  has  been  invited  to 
purchase  an  interest  in  the  business : 


Assets. 

Fomiture  and  Fixhires ^'^'i.'?^   Dec  31,  .907 

50,000 


Accounts  Receivable 

Merchandise 


Ga^sh. 


$7,000 
30,000 
25,000 


Meal  Estatc.V.V.V.V.V.*.*. ^^/^ 

B"Mngs :i\\*;;:v.v:;:;;;;;:  at^ 

Bills  Receivable. J 

5>ooo 


58,000 
8,000 
18,000 
25,000 
10,000 


Total  Assets , * 


113,000       $177,000 


LlABIUTIfiS. 


Capital   ......••.,.,,,,,,,,, , 

Accounts   Payable .7.  *.*[.]]  ] .  \ . 

Real  Estate  Mortgage... ,. 

Bills   Payable 

Total  Liabilities «,»-.«««       * 

••••    ?ii3,ooo       $177,000 

M  a  result  of  your  enquiries  you  ascertain  the  following  facts  : 

I.    The  business  has  been  estabUshed  under  the  present  ownership  four 

ycHrB. 


$53,000 

$67,000 

35,000 

65,000 

5,000 

5,000 

20,000 

40,000 

a.    The  sales  and  profits  as  shown  by  the  books  have  been : 


1    «;iiuii|g 

Gross 

Net 

>ec  31 

Sales 

Profits 

Profits 

1904 

$150,000 

$22,000 

$10,000 

190S 

230.000 

29,000 

15,000 

1906 

270,000 

32,000 

17,000 

1907 

340,000 

37.000 

22,000 

30<5 


C.  P.  A.  Examimtion  Papers. 

3.  The  book  value  of  real  estate  was  written  up  in  1907  $3,000,  which 
was  treated  as  profit  for  that  year. 

4.  Of  the  accounts  receivable  Dec.  31,  1907,  $3,ooo  were  bad.  Of  this 
amount,  $2,000  related  to  1907  and  $1,000  to  1906  business. 

5.  There  was  omitted  from  the  Dec.  31,  I907,  inventory  $2,000  of  mer- 
chandise which  had  been  paid  for,  and  there  was  included  in  the  same 
inventory  $1,000  which  had  not  yet  been  entered  on  the  books. 

You  are  required  to  make  in  the  profit  and  balance  sheet  figures  as 
above  stated  such  adjustments  as  you  may  consider  necessary,  and  to  ar- 
range the  adjusted  balance  sheets  in  the  form  best  calculated,  in  your 
opinion,  to  give  a  clear  view  of  the  condition  of  the  business  at  the  close 
of  each  of  the  two  years. 

You  are  further  required  to  make  a  brief  report  to  your  client  comment- 
ing on  or  calling  attention  to  any  points  you  may  think  it  desirable  to 
bring  especially  before  his  notice. 

5.  The  Republican  Asphalt  Contracting  Co.  is  forced  into  liquidation; 
and  the  Receiver,  when  taking  possession,  finds  the  books  of  account  to 

show: 

Liabilities. 

Bills  Payable  $18,000 

Creditors*  open  accounts 75,500 

Mortgage  on  Real  Estate  and  Improvements I7,500 

Mortgage  on  Contracting  Equipment 7,ooo 

Capital  Stock  Subscribed $100,000 

Less  not  paid  up 2,500    97,500 

$215,500 

Assets. 

Cash  in  Bank  and  Office $700 

Bills  Receivable  4,300 

Debtors*  Accounts 8,200 

Bonds  and  Warrants 23,000 

Real  Estate  and  Improvements 35,ooo 

Manufacturing   Plant 24,000 

Contracting   Equipment 14,000 

Uncomplete  Contracts  (Cost) 41,000 

Inventory  of  Materials  and  Supplies 3,500 

$153,700 

The  bondsmen  on  the  unfinished  contract  estimate  that  an  expenditure 
of  $25,000  will  complete  the  uncompleted  contract  and  realize  the  contract 
price  of  $60,000,  and  their  offer  of  $2,750  for  the  inventory  of  material 
and  supplies  as  part  of  said  expenditure,  is  accepted  by  the  receiver.  The 
company  owes  for  personal  taxes  and  adjustment  of  Employer's  Liability 
premiums  $175  and  $100  respectively,  and  unpaid  labor  accounts  amount- 
ing to  $1,700,  which  amounts  do  not  show  on  the  books  of  account 

307 


J9 


I  I' 


I 


Accmntancy  ProMems  and  Solutions, 

l%c  blis  feccivaMe  amotmtiiig  to  $4,300  are  pledged  as  collateral  for 
?3.5oo  due  creditors,  and  $20,000  of  the  bonds  and  warrants  have  been 
pwn  as  security  for  $33/m  due  creditors.  $1,000  of  the  bills  receivable 
is  tnosequently  dishonored. 

Tic  receiver  finds  that  $1,100  of  the  debtor's  accounts  is  collectible. 
The  sale  of  real  estate  and  improvements  (book  value  $35,000)  realizes 
«32,soo~manufactunng  plant  40  per  cent,  of  the  book  value,  contracting 
«impment  35  per  cent,  of  book  value. 

Prepare  a  statement  of  affairs  and  deficiency  account. 

li  Without  using  figures,  devise  forms  of  periodical  financial  state- 
ments (to  mclude  manufacturing  account,  profit  and  loss  account,  and 
balance   sheet)    for   any   manufacturing   business   with   which   you   arc 

Biniiiar. 


» 


Auditing. 
FfikF,  August  7—2  to  5.30  P.  M. 

Answer  Six  Questions. 

I.    What  are  the  fesponsibilities  of  an  auditor  and  what  should  be  his 

'Qtiiiincations  ? 

^.  }^\  ^Z^.  ^*™*  reasons  why  a  firm  or  corporation   should  have 
pcnodical  auditi. 

(b)  What  advantage  has  a  firm  or  corporation  in  employing  a  certified 
public  accountant  for  the  work? 

(c)  How  far  should  an  auditor  enquire  into  the  work  of  his  ore- 
decessor?  *^ 

3.  Draw  up  a  form  of  certificate  you  would  give  where  you  found  the 
accounts  properly  kept.    Also  where  accounts  are  incorrect. 

4.  (a)  Explain  how  you  would  proceed  in  auditing  the  affairs  of  a 

COfforatioa 

(b)  In  an  audit  where  an  exhaustive  examination  of  the  books  is  not 
iMticab  e,  what  arc  the  particular  points  to  which  the  attention  of  an 
auditor  should  be  directed? 

S    State  briefly  your  duties  as  an  auditor  in  reference  to  the  foUowiiM 

matters :  ^* 

(a)  Mach.nery.  the  value  of  which  has  not  been  regularly  depreciated. 

(b)  Loans  from  bankers. 

(c)  Doubtful  debts, 

(d)  Good  will 

JOB 


C,  P.  A.  Examination  Papers, 

6  How  would  you,  as  auditor  of  an  incorporated  company,  satisfy 
yourself  of  the  existence  of  shares  or  bonds  given  as  security  for  loans  to 
the  company? 

7.  What  important  items  would  you  look  for  in  auditing  accounts  of  a 
county,  a  city  and  a  school  district? 

8.  A  firm  of  export  merchants  desire  a  thorough  investigation  of  the 
past  year's  transactions,  having  reason  to  suspect  fraud.  State  concisely 
upon  what  lines  you  would  proceed  to  satisfy  yourself  that: 

(a)  Goods  had  been  taken  out  of  the  store  on  bond  in  the  way  shown 

by  the  books. 

(b)  They  had  been  shipped  to  account  of  proper  consignee. 

(c)  That  no  goods  had  been  removed  without  being  charged 

(d)  That  no  fictitious  entries  had  been  made  in  the  books. 


Commercial  Law. 
Saturday.  August  8—9  A.  M.  to  12.30  P.  M. 

Answer  Six  Questions. 

1.  (a)  What  is  an  executor?    An  administrator? 

(b)  What  are  the  rights  of  creditors  as  against  the  estate  of  a  deceased 
person  ? 

(c)  Define  intestate? 

2.  What  do  you  understand  by  bankruptcy  proceedings,  and  what  effect 
have  they  on  claims  of  creditors? 

3.  What  is  a  garnishment?    Who  if  anybody  are  exempt  therefrom? 

4.  What  do  you  understand  by  exemption  of  a  debtor? 

5.  (a)  Define  a  bill  of  exchange. 

(b)  What  is  the  difference  between  inland  bill  of  exchange  and  foreign 
bill  of  exchange? 

(c)  Define  acceptance  as  used  with  reference  to  a  bill  of  exchange 

6.  (a)  Define  a  negotiable  promissory  note. 

(b)  What  is  the  liability  of  a  general  endorser  on  a  promissory  note? 

7.  (a)  By  whom  must  all  contracts,  deeds,  mortgages,  leases  and  other 
instruments  binding  a  corporation  be  signed?  And  whence  do  the  signen 
derive  their  authority? 

(b)  Explain  the  manner  of  issuing  and  of  transferring  the  capital  stock 
of  the  corporation,  and  state  the  principal  rights  acquired  by  stockholdert. 

(c)  What  is  the  limit  of  a  stockholder's  liability? 

8.  State  the  essential  feature  of  a  partnership.  Must  each  partner  have 
an  interest  in  both  profits  and  losses? 

309 


III 11 1 I'll 1 


Accmniancy  Problems  and  Solutions. 


Tic  State  Board  of  Accountanqr  of  New  York. 

Practical  Accoiintiiig — ^Pait  I. 
Tueicky.  Fcbniaiy  I,  1910— 1.15  to  4.15  P.M..  only. 

Amwer  two  quesHons  but  no  more.  Answers  in  excess  of  the  number 
required  wiM  not  be  considered.  Do  not  repeat  questions  but  write 
answers  ml%  designating  by  number  as  in  question  paper.  Check  (O 
ike  number  of  each  one  of  ike  questions  you  have  answered.  Each  com- 
plete answer  wHl  receive  25  credits.  Papers  entitled  to  75  or  more  credits 
will  be  accepted, 

I.  A  ire  in  the  office  of  a  firm  of  traders  partly  destroyed  the  books  of 
accoiuit  that  had  been  fully  posted  in  anticipation  of  proving  their  cor- 
rectness. The  following  ledger  accounts  were  found  to  be  legible: 

Purchases  net  $23000 

Cash  discounts  lost ...........[[[[       '330 

Cash  discounts  gained . , [ '  [  *      j  j-q 

aaies  net ....,.,,,,,,,, iRotmi 

lais  receivable... ,7™ 

upon  inquiry  the  bank  balance  was  ascertained  to  be 43,000 

Bills  receivable  had  been  discounted  at  the  bank,  amounting  to. . ! '.     15*000 
An  inspection  of  the  checks  paid  by  the  bank  showed  amount  paid 
creditors,  including  |20,ooo  notes  payable. 33,000 


.J"}^^":^  ^^^^'  prepared  at  the  last  closing  of  the  books  and  containing 
the  foUowmg  items  was  produced  by  one  of  the  partners : 

Cash  , . , 

Accounts  receivable  

Loans  receivable .'*.'.*.**!.'.","!!.*!];.';;;;.;; 

Real  estate. 

Notes  receivable 

Accounts  payable. 

Notes  payable , . . ^^^^^ ....['.* 

Mortgages  payable 

Inventory  '"^ 

, 12,000 

• ••• 84,000 


$20,000 
42,000 
8,000 
30,000 
14,000 
10,000 
20,000 


^^P*^^^ 


The  firm  stated  that  the  real  estate,  loans  receivable  and  mortgages 
payable  remained  as  shown  in  the  balance  sheet. 
An  inventory  of  goods  in  storage  amounted  to  $15,000 

thSS:  .r^^x^  ""^ ''' ''  "^'^  ^'^^-^"^  ''^  ^^^^-"  ^' 

2.  The  directors  of  a  manufacturing  company,  before  the  closing  and 
auditing  of  the  books  for  the  half  year  ending  December  31,  declar^  out 
of  the  net  earmngs  of  the  company,  a  dividend  for  the  half  year,  of  4%  on 

310 


C.  P.  A.  Examination  Papers. 


the  preferred  stock  of  $100,000  and  3%  on  the  common  stock  of  $100,000. 
There  has  been  brought  forward  from  the  last  half  year,  an  undivided 
balance  of  profit  of  $4,000  and  after  the  audit  of  the  books  the  trial  balance 
is  found  to  be  as  follows : 


Trial  Balance  December  31. 


Real  estate  and  building..  $32,500 

Plant  and  machinery 40,000 

Patents  and  good  will ....  80,000 

Inventory  July   i 29,000 

Purchases 82,500 

Labor    88,000 

Coal    6,000 

Salaries  general 1 1,000 

Salaries   management 5,000 

Insurance 875 

Allowances 6,250 

Freight  1,500 

Discount  and  interest 750 

Cash  in  bank 8,000 

Investments    15,500 

Miscellaneous    expense....  4,300 

Bank  debts 42,000 

Pfd.  stock  in  treasury. . . .  5,000 

Repairs 1,000 


Preferred  stock.. 
Common  Stock  . 

Sales  

Notes  payable... 
Account  payable. 


$100,000 

100,000 

219,175 

26^000 

I4fO0Q 


$459,175  $4g9>i7S 

Stock  on  hand  $26,500.  From  the  above  prepare  profit  and  loss  and 
income  statement  and  balance  sheet,  giving  effect  in  accounts  to  deprecia- 
tion at  the  rate  of  7^%  a  year,  on  plant  and  machinery,  and  making  an 
allowance  of  5%  on  the  book  debts  to  provide  for  bad  debts;  also  create  a 
liability  in  the  balance  sheet  for  dividend  as  stated. 

3.  A.  B.,  a  commission  merchant,  doing  business  on  5%  basis,  hands 
you  the  following  abstract  of  his  ledger,  showing  his  transactions  for  the 
year;  furnish  A.  B.'s  capital  account,  showing  his  original  investment,  a 
balance  sheet  and  a  detailed  cash  account. 

^^'^^ $22,500      $30,000 

^^^]sht 1^50  TOO 

Claims  and  allowances  on  settled  accounts  only 300  750 

Expense ^^ 

Customers'   accounts 30^000       22,500 

Creditors'   accounts jgj^^       19,^5 

Z^     "''\ 29,500       2047S 

Discounts  lost  200 


3" 


f 


H  I 


Iwi 


I 


> 


Accountancy  Problems  and  Solutions. 

„  ,  Tkal  Balance 

^sues  .... 

Krdghi. .:::;:::::;;;;;;:;:;;:::•••••• '^-s* 

Claims  and  allowances ^'^^° 

Expense ^^ 

Customers'  accounts ] ^^ 

Creditors'  accounts...           30,000 

Gash ',['.[[',[ ^^'^^^ 

Wscounts  lost * 29,500 

Commission  account.  5%  on  |22,sto  *  .".'*.'.' *  ^^ 


$30,000 
700 
750 

22,500 

19,925 
20,475 

I,I2S 


Capital 


$95475 
7,500 


$^02.975    $102,975 

Account  Sales  Rendered.  —    ■ ■ ■ 

•bales  

Charges:  $22,500 

Freight 

Claims  and  allowances....... ^^^ 

Commission,  5% * 75o 

^»I25         2,575 

Net  proceeds  credited  to  shipper's  account ZZZ  1^^ 

Practical  Accounting— Part  11. 
Wednesday,  FcbruMy  2.  1910^9.15  A.  M.  to   12.15  P  M    only 

Answer  two  questions  but  no  more     A^»„^    •  '       * 

re^^i  will   not  be   conJere2DoZTei^l'''''V^  '''  '•«'«^- 
^ns^rs  only   ,esi,natin.  By  num,ras X ZttnZT^ 
me  number  of  each  om^  iif  *i,  .-  9uesnon  paper.     Check  (i^\ 

Purchases  from  Clearing  House  Brokers. 

Carpenter,  Bagot  &  Co  An^  km    t  ^^^  '<»  ^ 

Morgan,  Ryan  &  Co. Z    «  '  iJ""^^  ^^^'""^'y'  ?"«     $7.02 

J  000  March 

William  Commission  Co.V.!.'.;;  |^    "■     J" 

100     "  *• 


it 


U 


I* 


n 


i< 


M 


7.21 

7-ao 
6.90 
6.90 


312 


C.  P.  A.  Examination  Papers, 


Sold  to  Clearing  House  Brokers. 


tt 


Carpenter,  Bagot  &  Co 400  bbl,  January  delivery,  price 

Morgan,  Ryan  &  Co 500    "  March 

do  700    "  June 

William  Commission  Co 100    "  July 


it 


$7.03 
7.22 

7.19 
6.93 


Clearing  House  Closing  Prices. 

January I7.02 

March  7.22 

June    7.20 

July 6.93 

Note — Each  barrel  is  considered  as  containing  400  lb  of  oil. 
Show  transaction  in  all  the  books  and  a  profit  and  loss  account,  taking 
the  inventory  at  closing  prices. 

5.  The  output  of  the  A.  B.  C  Coal  Company  for  the  year  ending  De- 
cember 31,  1899,  was  1,567,833  tons  and  the  trial  balance  of  that  date  was 
as  follows: 


Plant,  machinery,  etc. 

Construction  (jp  proc- 
ess)   

Bills  receivable 

Accounts  receivable... 

Cash   

Materials  (10%  in- 
ventory)    

Coal  on  hand,  Jan.  i, 

1899   

Wages    

Supplies  (10%  inven- 
tory)     

Injuries  to  persons.... 

Salaries   

Insurance    

Taxes  

Office  expenses 

Legal  expenses 

Dividends    

Rentals  and  royalties. 

Freight   outward 

Horse  and  wagon  hire 

Allowances   

Miscellaneous  


$5,000,000 

85790.50 
63,000 
21,650.29 
98,752.31 

145,853.20 

12,750.36 
1,973,376.89 

389,402.20 
10,000 

45,750 
20,482 

26,597.40 
29.872.50 

36,731.09 
150,000 
262,530.20 

361,951.17 

109,532.10 

94.321.60 

8,750.21 


Capital  stock 

Sales    

Accounts  payable. 


$5,000,000 
3,857,642.76 
89451.26 


$8,947,09402 


$8,947,09402 


313 


i"  I II 


Mk 


Accountancy  Problems  and  Solutions. 

Coal  on  hand,  per  inventory,  $15,862.70. 

From  the  foregoing  prepare  a  balance  sheet,  and  income  and  profit  and 
loss  account,  the  latter  to  show  gross  earning  and  net  earnings. 

6.  The  Virginia  Coal  Co.  was  originated  on  January  i,  1906,  began 
operations  about  January  7,  1906,  and  kept  an  ordinary  set  of  books  (by 
double  entry)  but  did  not  close  their  accounts  at  the  end  of  any  fiscal 
year. 

After  an  examination  and  verification  of  all  accounts  stated  in  the  trial 
balance  they  are  accepted  as  correct,  except  that  termed  "  Sinking  Fund 
Payments"  ($22,500). 

The  mortgage  securing  bonds  to  the  amount  of  $200,000  contains  a  sink- 
ing fund  clause  providing  that  the  company  shall  deposit  semi-annually 
with  the  Sinking  Fund  Trustee  5c  per  ton  on  all  coal  mined ;  such  pay- 
ments shall  be  made  to  trustee  during  January  and  July  of  each  year  for 
the  preceding  six  months'  period.  Money  so  deposited  is  to  be  applied,  as 
soon  as  practicable,  to  purchase  bonds  at  not  exceeding  115  and  accrued 
interest;  compensation  and  expenses  of  trustee  are  also  to  be  paid  from 
Ac  Sinking  Fund.  Bonds,  when  redeemed,  cannot  be  canceled  but  arc 
to  be  held  by  trustee,  who  shall  collect  the  semi-annual  interest  thereon 
and  apply  to  the  same  purposes  as  the  5c  per  ton  payments. 

Bonds  are  dated  January  i,  1906,  run  for  20  years  and  bear  interest  at 
6%  per  annum,  payable  January  i  and  July  i  of  each  year. 

Payments  to  Sinking  Fund  Trustees  (the  (General  Trust  Co.)  have  been 
as  follows : 

July  27/06.    Payment  for  6  mo.  ended  6/30/06,  5c  per  ton  on 

120,000  tons $6,000 

Jan.  24/07.    Payment  for  6  mo.  ended  12/31/06,  5c  per  ton  on 

150,000  tons  7fSoo 

July  28/07.    Payment  for  6  mo.  ended  6/30/07,  5c  per  ton  on 

i8o,oootons ^9^ 

$22,500 


On  January  30,  1908,  the  company  paid  to  the  General  Trust  Co.  (S.  F. 
Trustee)  $5,500  for  Sinking  Fund  payment  for  the  6  mo.  ended  Dec.  31. 
1907,  being  5c  per  ton  on  110,000  tons. 

Tfcc  General  Trust  Co.  submitted  statement  of  receipts  and  disburse- 
ments for  account  of  the  Sinking  Fund  to  date  (January  3h  1908)  as 
follows : 

Cash  Received  to  Dec  31/07. 

July  27/06.    S.  F.  deposit  for  6  mo.  ended  June  30*  1906,  120,000 

tons  at  5c $6,000 

Jan.    5/07.    Jan. /07  coupons  on  5  bonds ^S© 


C.  P.  A.  Examination  Papers. 

Jan.  24/07.    S.  F.  deposit  for  6  mo.  ended  Dec.  31,  1907,  150,000 

tons  at  sc 7,500 

July    3/07.    July  /07  coupons  on  12  bonds 360 

July  28/07.    S.  F.  deposit  for  6  mo.  ended  June  30/07,   180,000 

tons  at  5c 9,000 

$23,010 

Cash  Disbursements  to  Dec.  31/07.  """" 

Aug.  16/06.    Bonds  redeemed— 5,000  at  no $5i50O 

Commission  at  J4% 12.50 

Accrued  interest 37.30 

$S5S0 
Feb.   15/07.    Bonds  redeemed: 

4,000  at  108 $4,320 

2,000  at  no 2,200 

1,000  at  112 1,150 

$7,640 

Commission  17.50 

Accrued  interest 52.50 

$7,710 

Aug.  12/07.    Bonds  redeemed: 

9,000  at  90 $8,100 

1,000  at  par 1,000 

$9,100 

Commission 250 

Accrued  interest 70 

9420 

Dec  31/07.    Compensation  of  trustee $100 

Advertising   50 

150 

$22^30 


Cash  balance  in  hands  of  trustees  Dec.  31/07 

Received  in  January,  1908,  viz. : 
S.  F.  deposit  for  6  mo.  ended  Dec.  31/07,   110,000 

tons  at  5c 5,500 

Jan.  /08.    Coupons  on  22  bonds  in  S.  F 660 

Interest  allowed  on  balance  to  12/31/08 100 


$180 


6,260 

$6,440 

Prepare  entries  to  state  properly  on  the  books  of  the  Virginia  Coal  Co, 
all  Sinking  Fund  transactions. 


314 


315 


r 


Accountancy  Problems  and  Solutions. 

Auditing. 

Weclieiiliy,  February  2,  !9I0~I.I5  to  4.15  P.  M..  only. 

Answer  lo  questions  but  no  more.  Answers  in  excess  of  the  number 
required  will  not  be  considered.  Do  not  repeat  questions  but  write 
tmswers  only,  designating  by  number  as  in  question  paper.  Check  (/) 
the  number  of  each  one  of  the  questions  you  have  answered.  Each  com^ 
plete  answer  will  receive  lo  credits.  Papers  entitled  to  75  or  more 
credits  will  be  accepted. 

1.  An  insurance  company  buys  $50,000  7%  10  year  bonds  at  116  for 
investment.  The  bonds  will  mature  at  the  expiration  of  5  years.  How 
should  this  purchase  be  entered  in  the  balance  sheet?  What  should  be 
done  with  the  premium? 

2.  If  in  the  course  of  an  audit  it  appeared  that  capital  expenditures  had 
been  charged  against  profit  and  loss  account  or  items  of  expense  charged 
against  improvement  account,  what  should  the  auditor  do  in  respect  to 
inch  charges? 

3.  What  entry  should  be  made  in  the  books  of  a  company  of  goods  sent 
out  on  consigment?  When  goods  have  been  sold  and  the  consignee  sends 
in  his  account  sales,  what  entries  should  be  made? 

4.  A  company  has  caused  a  revaluation  to  be  made  of  its  plant,  ma- 
chinery and  buildings,  and  the  new  values  are  found  to  be  greater  than  the 
book  values.  How  would  you  treat  such  excess  in  (a)  the  balance  sheet, 
(b)  the  profit  and  loss  account? 

5.  In  auditing  the  books  of  a  corporation  the  president's  salary  account 
was  found  to  have  been  credited  with  a  bonus  of  $5,000  for  "extra 
services."    Under  what  conditions  would  you  pass  this  entry? 

4  An  annual  audit  of  the  books  of  a  copartnership  whose  fiscal  year 
dosed  with  the  calendar  year,  was  begun  on  January  26,  1909.  How  would 
you  proceed  to  prove  statement  of  cash  as  per  their  trial  balance? 

7.  How  should  an  auditor  ascertain  if  the  following  assets  appearing 
in  balance  sheet,  have  been  taken  at  a  fair  value:  (a)  merchandise,  (b) 
machinery,  (c)  real  estate? 

8.  What  account  should  be  charged  with  discount  on  bonds  sold  for 
BBiistruction  and  the  expense  of  disposing  of  such  bonds?    Give  reasons. 

9.  Is  it  the  duty  of  an  auditor  of  a  bank  actually  to  inspect  the 
■ecurities  representing  the  bank's  investments?    Why? 

316 


12 


C  p.  A,  Examination  Papers. 

10.  An  auditor  who  is  employed  to  close  the  accounts  of  a  firm  and 
prepare  a  balance  sheet,  finds  that  the  current  work  is  behind  and  that  no 
trial  balance  has  been  effected  for  over  a  year.    How  should  he  proceed? 

11.  Would  the  auditor  of  a  firm  ot  corporation  be  warranted  in  revis- 
ing the  form  and  wording  of  a  balance  sheet  before  attaching  his  certificate? 
Why? 

!.    Is  it  necessary  to  verify  the  stock  ledger  of  a  corporation?    Why? 

13.  The  preferred  stock  of  a  corporation  is  entitled  to  cumulative 
dividends  of  7%  a  year.  The  company  has  paid  dividends  on  this  stock 
at  the  rate  of  5%  a  year  for  10  years.  How  should  the  arrears  |of 
dividends  appear  on  the  balance  sheet? 

14.  Suggest  a  system  for  keeping  a  petty  cash  book  and  petty  cash 
vouchers.    Give  forms. 

15.  Are  there  in  your  opinion  any  reasons  in  favor  of  continuous  audit- 
ing?   If  so,  give  such  reasons. 


Theory  of  Accounts. 

Tuesday.  February   1.   1910— 9.15  A.  M.  to   12.15  P.  M.  only. 

Answer  10  questions  but  no  more.  Answers  in  excess  of  the  number 
required  will  not  be  considered.  Do  not  repeat  questions  but  write 
answers  only,  designating  by  number  as  in  question  paper.  Check  (*^) 
the  number  of  each  one  of  the  questions  you  have  answered.  Each  com- 
plete answer  will  receive  10  credits.  Papers  entitled  to  75  or  more 
credits  will  be  accepted. 

Ll\  K^f"'  a^d  differentiate  the  following  kinds  of  statements:  (a) 
trail  ba  ance,  (b)  balance  sheet,  (c)  statement  of  assets  and  liabilities, 
(d)  statement  of  affairs.  ^ 

Tfirn,^.?^^'"  the  purpose  and  the  manner  of  keeping  a  private  ledger  of 
a  nrm  or  corporation. 

d«ft  on  C  fn    «   f  H*?'  *?  ^'"^'"  "*"*  •''  ^""^  B.  a  three  months 

iudifferLrr*!;*^    ^"L'  ■'  *''°°°  ""^^  *">  C.  owes  A.    To  adjust 

ftl  dtrr  K  "'^  '*  ^T  """""^  °"  A-  ^'  *'.«»•  Assuming  hat 
the  drafts  have  been  accepted  by  the  respective  parties  state  what  entri.^ 
his  books  should  show.  Pames,  sute  what  entries 

317 


w 


Accountancy  Problems  and  Solutions. 
are  or^n!rrt'^\'"'""t  °^  ^^^^ms  in  general  use.    What  book. 

w4h  vrt  *!  """Ti  '^'!f  °^  ^"°"«  °'  =^  '"'^'^"^"tile  concern  with 
Which  you  are  acquamted  and  describe  briefly,  the  use  of  each. 

s^  °  o^r.c?  r -r^ou-  r dira^rbaiT^Tp^ 

st'a^e  wheZr*"  '"""  M   "  •"""*'''  '""^^^  *°'  '^  '""'=="'tile  concern  and 
Sg  reaso;/°"  *°""  "~"""^'"'  ""^  "^'  »'  =>  '^'"«'  »'  '"ose  leaf  book. 

10.  What  is  a  controlling  account?    Give  an  example. 
#' 

11.  How  would  you  deal  with  items  accrued  and  due  (such  as  rent 

r  r  rscaTtn  "df  ^  -"-^ ''°'-  ^^ — °'  ^  "-^^  -  ^e 

.  '^  isVvShTr^f::  *'  '""""'"^  appropriations  for  the  year  ,904  and 

Bond   redemption 

Bond   interest . ' $2,000 

Salaries ®0O 

Contingent  expenses ...!..... ^"^^ 

Police 500 

Poor ...,. ^'^°^ 

Care  of  streets 750 

Lighting *  ] i»20o 

Education 950 

3.000 

$13,500 

' '  ■ # 

Open  the  village  books  in  accordance  therewith.    How  will  collection  of 
taxes  be  recorded?     How  will  H.«K«rc«««  ^  .  "  collection  ot 

recorrleH?    wi,.*      n  ^  T  T      disbursements  against  appropriations  be 
recorded?    What  will  the  balances  of  the  accounts  at  any  date  show ? 

318 


C.  P,  A.  Examination  Papers. 

'  13.    What  is  a   contingent  liability?     Give  examples.     In   what  form 
should  such  liabihties  appear  in  a  financial  statement? 

14.  Is  depreciation  of  plant  a  legitimate  element  of  the  cost  of  goods 
produced?  Explain  the  method  employed  to  keep  plant  in  efficient  condi- 
tion out  of  earnings. 

*^  15.  Give  the  ruling  of  a  stock  or  shares  ledger  for  a  corporation.  Show 
how  this  book  is  kept  and  indicate  its  relation  to  the  general  books  of 
account. 


Commercial  Law. 
Thursday,  February  3.  1910— 9.15  A.  M.  lo  12.15  P.M..  only. 

Answer  10  questions  hut  no  more.  Answers  in  excess  of  the  number 
required  will  not  he  considered.  Do  not  repeat  questions  hut  write 
answers  only,  designating  by  number  as  in  question  paper.  Check  (f^) 
the  number  of  each  one  of  the  questions  you  have  answered.  Each  com- 
plete answer  will  receive  10  credits.  Papers  entitled  to  75  or  more 
credits  will  he  accepted. 

1.  What  is  the  meaning  of  the  term  " in  escrow"? 

2.  What  is  a  contract? 

3.  What  are  the  principal  elements  in  every  contract  ? 
"4-  What  is  a  partnership? 

*S'    What  is  an  executor? 

6.    Can  a  partnership  hold  real  estate  in  its  firm  name? 

V    mat  will  be  the  result  if  the  title  to  real  estate  purchased  by  part- 
nership funds  is  taken  in  the  name  of  one  of  the  partners? 
J- 
a    What  is  an  accommodation  party  and  what  is  his  liability? 

alces  bl  mtde?""'  "'"""'^  *'  ''"^  '''°""  P"^^"*""**  °f  d"**  or  accept- 
'la    Does  the  certification  of  a  check  discharge  the  drawer  from  liability? 

Jh'    ^^'  "ability.  «  any,  does  a  bank  assume  in  paying  a  check  to  a 
holder  who  claims  under  a  forged  indorsement? 

319 


Accountancy  Problems  and  Solutions. 

12.    a  Will  an  assignee  acting  in  good  faith  be  protected  in  his  acU  i£ 
the  assignment  is  afterward  set  aside  as  fraudulent? 

b  What  is  the  general  personal  liability  of  an  assignee  for  damages 
resulting  from  his  acts  or  omissions? 

r  What  compensation  is  allowed  an  assignee? 

*  13.  When  may  an  executor  voluntarily  present  his  account  and  ask 
that  the  same  be  judicially  settled? 

14.    II  How  many  witnesses  arc  necessary  to  the  valid  execution  of  t 

Wlllf 

b  What  persons  under  the  statutes  are  permitted  to  make  wills  of  per- 
sonal property?  of  real  property? 

c  May  any  of  the  formalities  necessary  to  the  execution  of  a  will  be 
omitted  in  the  execution  of  a  codicil? 

*"  IS  In  what  cases  would  the  signing  of  the  firm  name  to  a  note  by  one 
member  of  a  firm  without  consultation  with  the  other  member  or  mem- 
bers, bind  the  firm? 


320 


C.  P.  A.  Examination  Papers. 

The  State  Board  of  Accountancy  of  Ohio. 

Examination  in  Practical  Accounting.— Part  I  * 

Wednesday.  March  9.  1910—8.30  A.  M. 

Time  allowance,  4%  hours. 

Problem  No.  1. 

A  and  B  are  partners  and  share  profits  in  proportion  to  their  capital 
invested.  C,  D  and  E  are  partners,  having  equal  interest  in  the  business. 
A  balance  sheet  from  the  books  of  A  and  B  is  as  follows : 

Assets  : 

Accounts  Receivable $2,500.00 

Cash  in  Bank 1,000.00 

Merchandise  as  per  inventory 2,500.00 

$6,000.00 

Liabilities  : 

Accounts    Payable $1,200.00 

A*s    investment 1,500.00 

B's  investment 2,000.00 

Bills  Payable 500.00 

Undivided  Profits 800.00 

$6,000.00 

C,  D  and  E  kept  no  books,  but  have  the  following  Assets  and  Liabil- 
ities : 

Assets  : 

Cash  in  Bank $800.00 

Accounts  Receivable 3,000.00 

Merchandise  as  per  inventory 3,000.00 

Real  Estate— Warehouse 1,200.00 

$8,000.00 
Liabilities  : 

Mortgage  on  Real  Estate $500.00 

Accounts   Pa3rable 300.00 

$800.00 

♦  For  Part  Two,  Problem  No.  4,  v.  Part  I,  pp.  84-86. 


^^ 


Accountancy  Problems  and  Solutions. 

A  and  B  arrange  with  C,  D  and  E  to  form  a  corporation  with  a 
caiiital  stock  of  $15,000.00.  The  corporation  to  assume  all  Assets  and 
Liabilities  of  both  partnerships.  Each  partnership  agrees  that  a  reserve 
of  10  per  cent  against  Accounts  Receivable  shall  be  created  and  charged 
against  their  individual  partnership  holdings  prior  to  the  consolidation. 

The  entire  capital  stock  is  to  be  alloted  to  A,  B,  C,  D  and  E,  in  pro- 
portion to  their  partnership  holdings. 

The  organization  expense  paid  by  the  new  company  was  $200.00. 

Make  a  Balance  Sheet  for  the  new  company,  and  give  each  of  the 
aforesaid  partners  his  allotment  of  shares. 


State  Board  of  Accountancy  of  Ohio. 

Emminatioii  in  Practical  Accoiinting.-Part  I. 

ProDiem  No.  3. 

A  trial  balance  taken  from  the  books  of  a  company  which  buys  and  sells 
merchandise  and  also  manufactures  part  of  the  merchandise  it  sells  shows 
the  following  accounts. 

From  the  list,  and  without  using  figures,  construct  in  the  form  you 
consider  best  a 

(a)  Balance  Sheet; 

(b)  Manufacturing  Account; 

(c)  Trading  Account ; 

(d)  Profit  and  Loss  Account. 

Advertising; 
Accounts  Payable; 
Accounts  Receivable; 
Bills  Payable; 
Bills  Receivable; 
Bad  and  Doubtful  Assets; 
Cash; 

Capital  Stock; 
Depredation; 
Discounts  Allowed; 
Discounts  Received; 
Freight— Raw  Material; 

Freight— Merchandise  Purchased; 
Fuel; 

Furniture  and  Fixtures; 
Interest  Paid; 
Insurance— Plant; 
Factory  Supplies; 

Lttht; 

322 


C.  P.  A,  Examination  Papers, 

Labor — ^Warehouse ; 

Machinery  Repairs; 

Insurance — Merchandise ; 

Own  Product  Returned  by  Customers; 

Office  Expense; 

Machinery  and  Tools; 

Land  and  Buildings— Factory ; 

Office  Salaries; 

Purchases — Merchandise ; 

Printing  and  Stationery; 

Postage ; 

Donations ; 

Raw  Material; 

Rent— Factory; 

Rent— Store  and  Office; 

Reserve  for  Bad  and  Doubtful  Accounts; 

Reserve  for  Depreciation; 

Sundry  Factory  Expense; 

Salaries— Factory  Management ; 

Salaries— Sales  Department; 

Sales — Merchandise  Purchased ; 

Sales — Own  product ; 

Traveling  Expense — Sales  Department; 

Taxes ; 

Undivided  Profits  End  of  Last  Year; 

Wages,  Factory. 
Preparatory  to  closing  the  accounts  the  following  schedule  of  inventories 
has  been  made: 
Inventory  of  Raw  Material: 

Goods  in  Process; 

Manufactured  Product; 

Factory  Supplies; 

Merchandise  Purchased; 

Unexpired  Insurance — Plant ; 

Unexpired  Insurance — Merchandise ; 


Examination  in  Practical  Accounting. — ^Part  I. 

Problem  No.  2. 


Trial  Balance  After  Closing  Books. 
1908. 

Real   Estate $75,000.00 

Plant  and  Machinery J27  qoo  00 

Horses  and  Wagons ][\      23looo!oo 

323 


*  ■  •- 


Accoumimwy  Problems  and  Solutions. 

Patents  and  Groodwili. $30,000.00 

Inventory 7S,ooaoo 

Accounts  Receivable , , 52,000.00 

Cash  in  Bank 33,000.00 

Bills   Receivable 19,000.00 

Capital  Stock 

Accounts  Payable 

Notes  Payable 

Pttifit  and  Loss:. , 


$300,000.00 
34,000.00 
45,000.00 
55,000.00 


.1 , 


$434,000.00   $434,000.00 


$78,000.00 


1909k 

Real  Estate _ 

Plant  and  Machinery. 110,000.00 

Horses  and  Wagons 21,000.00 

Patents  and  Goodwill... 30,000.00 

Inventory    91,000.00 

Accounts  Receivable 50,000.00 

laJUli  in  Hank -m  000.00 

Bills  Receivable 17  000.00 

Capital  Stock 

Accounts  Payable 

Notes  Payable. 

Branch   House  Accounts 25,000.00 

Moftgige   , ., 

Profit  and  Loss 


$300,000.00 
34,000.00 
I5i0oaoo 

30,000.00 
87,000.00 


$462,ooaoo   $462,oooxx> 

From  the  above  two  trial  balances,  which  show  that  a  net  profit  of 
l32jOoo.oo  has  been  earned  during  the  year  1909,  prepare  an  account  show- 
ing what  has  become  of  the  profits  earned  in  1909. 


C.  P.  A.  Examination  Papers, 

The  State  Board  of  Accountancy  of  Ohio. 

iirr'"""_ 

Examination  in  Commercial  Law  as  Affecting  Accountancy 

Tuesday  March  8.  1910-7:30  P.  M. 

Time  allowance,  2%  hours. 

Note.— Do  not  repeat  questions,  but  refer  to  same  by  number  and  initial 
on  left-hand  margin  of  sheets.  These  question  papers  must  be  returned 
to  the  examiner  in  charge  at  the  same  time  that  the  examination  papers 
ore  handed  in. 

1.  (a)  What  is  a  corporation? 

(b)  What  is  a  charter  of  a  corporation? 

(c)  Distinguish  between  a  public  corporation  and  a  private  corporation? 

(d)  How  is  a  corporation  organized? 

(e)  Through  whom  does  a  corporation  act  in  transacting  its  business? 

2.  (a)  What  are  the  essential  elements  of  a  partnership? 

(b)  What  are  the  articles  of  co-partnership  and  are  they  essential  to  a 
partnership  ? 

(c)  Can  a  partner  sell  his  interest  in  a  firm,  and  if  so  would  the 
purchaser  be  a  member  of  the  firm? 

(d)  What  right  has  a  partner  to  bind  the  firm? 

(e)  In  the  event  that  the  name  of  a  partnership  does  not  clearly  show 
who  all  of  the  principals  of  the  firm  are,  what  is  necessary  for  such  a  firm 
to  do  in  order  to  bring  suit? 

(f )  Can  a  partner  bring  a  suit  against  the  firm  of  which  he  is  a  member, 
or  can  the  firm  bring  suit  against  one  of  its  members  for  the  collection  of  a 
debt? 

3.  (a)  What  is  a  contract? 

(b)  What  are  the  essentials  of  a  valid  contract? 

(c)  How  does  every  contract  originate? 

(d)  Name  three  or  more  contracts  that  must  be  in  writing  in  order  to 
be  enforced. 

(e)  What  rights  under  a  contract  may  be  assigned  and  what  rights  may 
not  be  assigned? 

(f)  When  does  the  statute  of  limitation  begin  to  run? 

(g)  What  is  the  statute  of  limitation  in  Ohio  on  Notes,  Sealed  Instru- 
ments, and  Open  Accounts? 

4.  (a)  What  is  a  negotiable  instrument? 

(b)  What  are  the  words  of  negotiability? 

(c)  What  are  the  principal  classes  of  instruments  which  are  usually 
.  made  in  such  form  as  to  be  negotiable? 


ABA: 


325 


■■■■I 


I 


Accountancy  Problems  and  Solutions. 

(d)  What  is  meant  by  "accommodation  paper"? 

(c)  What  are  the  rights  and  liabilities  of  parties  to  accommodation 

fiper? 

5-     (a)  What  is  agency? 

(b)  What  is  the  duty  of  persons  dealing  with  an  agent  with  reference 
to  the  extent  of  the  agent's  authority? 

(c)  Where  the  agent  discloses  his  principal  and  acts  within  the  scope 
of  his  authority,  what  is  the  principal's  liability  to  third  parties? 

(d)  What  remedy  has  a  principal  in  case  his  agent  pledges  negotiable 
paper  belonging  to  him? 

6.  (a)  What  is  the  difference  between  an  assignee  and  a  receiver? 

(b)  Under  what  conditions  will  an  assignment  for  the  benefit  of  cred- 
itors be  set  aside  ? 

(c)  How  must  an  assignee  qualify? 

id)  What  is  an  assignee's  duty  as  to  accounting? 

7.  (a)  What  is  cumulative  preferred  stock?    Wherein  does  it  differ 
from  non-cumulative  stock? 

(b)  What  are  a  stockholder's  rights  with  respect  to  the  books  of  a 
corporation? 

(c)  Under  what  theory  is  a  corporation  stockholder  liable  to  creditors 
for  unpaid  subscriptions  to  corporation  stock? 

(d)  Out  of  what  fund  may  dividends  be  paid? 

(e)  If  dividends  are  not  paid  in  accordance  with  your  answer  to  the 
preceding  question,  have  the  creditors  of  the  corporation  any  action 
against  the  company  or  its  stockholders  ? 

a  What  are  the  legal  qualifications  of  a  Certified  PubHc  Accountant  in 
Ohio  ? 


The  State  Board  of  Accountancy  of  Ohio. 

Examinalion  in  Auditing. 

Tuesday.  March  8.  1910— 2  A.  M. 

Time  allowance,  3%  hours. 

Note.— Do  not  repeat  questions,  but  refer  to  same  by  number  and  initial 
m  left-hand  margin  of  sheets.  These  question  papers  must  be  returned 
io  the  examiner  in  charge  at  the  same  time  that  the  examination  papers 
are  handed  in. 

I.  In  making  an  audit  of  the  books  of  a  corporation  whose  transactions 
ire  so  numerous  as  to  preclude  the  practicability  of  examining  all  entries 
In  detail  or  checking  all  postings,  what  course  would  you  pursue  in  your 
eaomination  to  insure  the  correctness  of  the  balance  sheet? 

326 


C.  P.  A.  Examination  Papers. 

•.    In  making  a  complete  audit    how  would  you  determine  the  cor- 
rectness of  the  following  items  on  the  balance  sheet? 

(a)  Customers' Accounts ; 

(b)  Bank  Balances; 

(c)  Bills  Receivable; 

(d)  Securities; 

(e)  Inventory  of  Finished  and  Raw  Materials. 

3.  Under  instructions  calling  for  a  complete  audit  and  verification  oi 
all  entries,  what  supporting  data  would  you  require  for  the  following:* 

(a)  Purchases; 

(b)  Returned  Purchases; 

(c)  Sales; 

(d)  Returned  Sales; 

(e)  Cash  Receipts; 

(f)  Cash  Payments; 

(g)  Journal  Entries. 

4.  On  what  basis  should  the  following  assets  be  valued  in  the  prepara- 
tion of  a  balance  sheet? 

(a)  Manufactured  Goods; 

(b)  Goods  in  Process  of  Manufacture; 

(c)  Raw  Material; 

(d)  Accounts  Receivable; 

(e)  Stocks,  Bonds  and  Similar  Investments; 

(f)  Bills  Receivable; 

(g)  Patterns; 
(h)  Patents. 

$.  A  salt  company  has  completed  a  manufacturing  plant,  the  machinery 
and  equipment  cost  being  $250,000.00.  It  is  assumed  that  because  of  the 
nature  of  the  business  the  entire  machinery  and  equipment  will  have  to  be 
replaced  every  several  years.  In  such  a  case  how  would  you  recommend 
that  current  repair  and  maintenance  charges  should  be  handled? 

6.  The  profit  and  loss  account  of  a  manufacturing  company,  at  the  close 
of  the  fiscal  year,  shows  on  the  debit  side — stock  on  hand  at  beginning  of  the 
year,  purchases  of  raw  material,  manufacturing  expenses,  general  and 
selling  expenses;  and  on  the  credit  side — sales,  stock  on  hand  at  the  close 
of  the  year.  Does  the  balance  of  these  accounts  constitute  the  net  profits 
for  the  fiscal  year,  or  should  other  charges  be  taken  into  account?  If  so, 
what  are  they? 

7.  You  are  sending  one  of  your  assistants  to  make  an  audit  of  the  books 
of  a  company  after  the  close  of  their  fiscal  year  engaged  in  wholesale 
merchandising.  In  the  form  of  instructions  to  him  state  briefly  the  suc- 
cessive stepts  he  is  to  take  in  making  this  audit  Also  give  him  m 
memoranda  of  what  he  shall  require  of  the  company  preliminary  to  the 
commencement  of  his  work. 


r 


Accountancy  Problems  and  Solutions, 

Tlic  State  Board  of  Accountancy  of  Ohio. 

Examination  in  Theory  of  Accounts. 

Tuoday.  March  8.  1910—9  A.  M. 

Time  allowance,  3%  hours. 

Note.— Do  not  repeat  questions,  but  refer  to  same  by  number  and  initial 
on  left-hand  margin  of  sheets.  These  question  papers  must  be  returned 
io  the  examiner  in  charge  at  the  same  time  that  the  examination  papers 
me  handed  in. 

I.  (a)  In  your  own  language  give  a  short  description  of  the  philosophy 
and  the  fundamental  principals  underlying  any  system  of  accounts  based 
on  theories  of  double-entry  bookkeeping. 

(b)  What  is  the  nature  of  the  accounts  on  the  debit  or  left-hand  side 
of  the  ledger? 

(c)  What  is  the  nature  of  the  accounts  on  the  credit  or  right-hand  side 

of  the  ledger? 


a.    (a)  Distinguish     between     "Receipts    and     Disbursements 
Revenue  and  Expense." 
(b)  Distinguish  between  "  Fixed  Assets  "  and  "  Current  Assets. 


3.    What  is  the  meaning  of  the  term  and  how  are  the  following  accounts 
used? 

(a)  Capital  Stock; 

(b)  Funded  Debt; 

(c)  Surplus; 

(d)  Dividend; 

(e)  Reserve  Accounts; 

(f)  Reserve  Funds; 

(g)  Expense; 
(h)  Venture; 
(i)    Suspense. 

4  Describe  fully  the  various  books  and  their  uses  in  a  business  with 
which  you  are  entirely  familiar. 

5.  Draw  up  a  balance  sheet  for  a  business  of  considerable  magnitude, 
Oilier  than  a  mercantile  or  trading  buiness,  having  a  share  capital  of 
several  classes  of  shares,  bonded  indebtedness,  floating  debts,  depreciation 
and  other  reserves. 

4    (a)  Give  a  definition  of  "Depreciation"  and  state  how  and  why  ft 


C.  p.  A,  Examination  Papers. 
(b)  Give  at  least  two  methods  of  treating  depreciation  on  books  of 

TrMake  the  necessary  journal  entries  to  illustrate  the  two  methods 
of  setting  up  depreciation  on  the  books  of  account 

7.  What,  on  the  books  of  a  company,  would  be  the  proper  method  of 
treating  cash  accounts,  as  follows? 

(a)  On  capital  expenditures. 

(b)  On  expenditures  for  materials  for  manufacturmg  purposes. 

(c)  On  discounts  allowed  to  customers  on  purchases  for  each,  where 
the  trade  terms  are  a  fixed  date  for  payment 

(d)  An  issue  of  bonds  is  made  for  the  construction  of  a  plant  It 
takes  two  years  to  erect  and  put  in  operation.  To  what  should  the 
interest  on  the  bonds  be  charged? 

8.  What  are  the  chief  considerations  to  be  kept  in  mind  in  formulating 
an  accounting  system  for  any  business? 

9.  What  are  the  general  classifications  of  cost,  the  sum  of  which  makes 
up  the  cost  of  a  manufactured  article  when  sold? 

10.  On  the  theory  that  accounts  may  fall  into  the  following  classifica- 
tions: 

(a)  Accounts  with  individuals; 

(b)  Accounts  with  things; 

(c)  Accounts  with  forces  or  ideas; 

give  a  number  of  illustrations  or  names  of  accounts  in  a  modem  account- 
ing system  under  each  of  these  heads. 


329 


liiiiiL 


^ 


Accountancy  Problems  and  Solutions. 

Papers  Set  by  The  Chartered  Accountants 
Association  of  Manitoba. 


Examination  Papers.  May  13.  1910. 


htemiecUate.— Mathematics. 


Time,  3  hours. 
I.    Simplify — 
^*^      i  (I  i/io)a  -^(^  3/5+Q/2.S)  f    X(i  12/17— ^^/.ti^a 


fa  i/a~i  3  1/2— (3  1/2— I  2/3)  [].-^ ^  ^A 

3  1/2  + 1  1/6 
^|,\       279.  8003  X. 0069 

2.  (a)  Extract  the  square  root  of  .00822649. 
(b)  Extract  the  cube  root  of  12812904. 

3.  What  amount  will  be  required  to  be  raised  annually  at  the  begin- 
nmg  of  each  year  for  five  years  so  that  there  may  be  sufficient  to  provide 
a  sinkmg  fund  of  $25,000  at  the  end  of  the  fifth  year  and  to  pay  interest 
on  $25,000  m  the  meanwhile  at  5  per  cent,  per  annum,  money  being  worth 
4  per  cent.  ? 

4.    $792  56-100  Winnipeg,  April  14,  1910. 

One  hundred  days  after  date  I  promise  to  pay  William  Jones  or  order 
seven  hundred  and  ninety-two  56-100  dollars,  with  interest  at  7%,  at  the 
Bank  of  Montreal  here.    Value  received. 

James  Thompson. 

Find  the  proceeds  of  the  above  note  discounted  on  the  23d  April  at  8%. 

refiizet  Z\Z  '  K V"'  ^^  '^'  Three  and-a-half  Per  Cents  at  92K  and 
realzes  $18,550.    If  he  mvests  two-fifths  of  the  proceeds  in  the  Four  Per 

.hTJ    ^'  u     •  '^^  ^"™^'"*^*^^  »"  *^«  Three  Per  Cents  at  90,  find  the 
alteration  m  his  income. 

vi'  I  ^  ^rT  u"^'  "'''  P^^  ""^-  ^''"'^''  *^^  ^"'^'*^^*  ^"  which  is  payable 
yearly  and  which  are  to  be  paid  off  at  par  three  years  after  the  time  of 

tTe  bonds  >      """"^^  ^  '^°'"**^  ^  ^^^  ''^"^■'  "^^^^  ^"''^  '^*^"'^  ^^  ^^''^^  ^°'* 

7.  A  shipment  of  cattle  was  insured  at  i  per  cent,  to  cover  the  value 
the  premium  and  $500  additional.  The  premium  was  $100.  Find  the 
value  of  the  cattle. 


330 


C.  P.  A.  Examination  Papers. 

8.  A  Winnipeg  merchant  owes  18,000  francs  in  Paris.  He  buys  a  draft 
on  London  when  sterling  exchange  is  at  8  and  when  one  pound  is  worth 
25  1-5  francs.    What  does  he  pay  for  the  draft? 

9.  Find  the  due  date  of  the  balance  of  the  following  account,  and  what 
amount  will  be  required  to  settle  it  on  the  ist  of  May,  1910,  interest  being 
charged  at  the  rate  of  6%  per  annum: 

Dr. 

To  Mdse.  at  30  days...  $800 

..  500 

.  700 

. .  600 


1910 
Jan.  I  St. 
Jan.  20th. 
Feb.  ist. 
Feb.  20th. 


(( 


it 


f€         tt 


tt 


tt 


tt 


tt         ft 


U 


tt 


tt 


Cr. 
Feb.    I  St.    By  Cash...  $500 
Mar.  15th.    By  Cash...    275 


Bookkeeping. — Practical  and  Theoretical. — Paper  No.  1. 

Time,  35^  hours. 

1.  The  position  of  A.  Brown,  brickmaker,  is  as  follows : 

Assets. 

Plant    $50,000.00 

Lease 5,000.00 

Horses  and  Equipment 10,000.00 

Book  Debts 5,000.00 

Bricks  on   Hand 8,000.00 

Fuel    2,000.00 

Cash  100.00 

Liabilities. 

Sundry  Creditors $27,000.00 

A.  Brown,  Capital  Accoimt 53,100.00 

$80,100.00    $80,100.00 

J.  Smith,  in  consideration  of  his  paying  $16,550.00  and  giving  his  note 
for  $10,000.00,  is  to  be  credited  with  a  half-interest  in  the  business,  A. 
Brown's  interest  being  correspondingly  reduced.  The  note  is  discounted 
with  the  bank  for  $150.00,  it  being  agreed  that  the  business  shall  stand 
the  cost  Give  the  necessary  journal  entries  to  show  these  transactions, 
and  thereafter  draw  up  balance  sheet  showing  the  position  of  affairs  at 
the  beginning  of  the  firm. 

2.  What  do  you  understand  by  the  following: 
Capital  Expenditure; 

Revenue  Ebcpenditure ; 

331 


■ iiiiBlM^^^^^^^^^^^^^^^^^^  : 


Accountancy  Problems  and  Solutions, 

Revenue  Income; 

Loose  Plant  and  Tools; 

Fixed  Plant  and  Machinery; 
and  give  one  typical  example  of  illustrating  each  from  any  business  you 
may  be  familiar  with, 

3.  Explain  the  difference  between  gross  and  net  profit,  and  from  any 
business  you  may  be  familiar  with  draw  up  short  accounts  to  illustrate 
your  answer. 

4.  The  partners  in  Question  One,  after  two  years'  operations,  decide 
to  close  their  books,  and  arrive  at  a  basis  of  dissolution.  J.  Smith  is  en- 
titled to  draw  $150.00  a  month  against  his  share  of  the  profits.  Both  have 
freely  withdrawn  capital,  as  the  following  trial  balance  shows : 


Plant 

Horses,  etc 

Accounts  

Bricks 

jj ricicmaKing  ...•...,,«.,,,,,,,,,,, 

Fuel 

Bank 

J.  Smith,  Drawings. 

Rent 

A.  Brown,  Capital  Account 

Wages   

Bille  Receivable  (being  unpaid  amount  of  origi- 
nal not  granted  by  J.  Smith) 

J.  Smith,  Capital  Account 

Expenses  

Accounts   Payable 

Teaming    , , . , 


$50,000.00 

4,000.00 

10,000.00 

7,000.00 

7,500.00 

9,000.00 

2400.00 
1,200.00 

15.650.00 

8,000.00 

5,000.00 


$28,500.00 
20,000.00 

9.750.00 


1 5.000.00 

40,000.00 
6,500.00 


$119,750.00    $119,750.00 


Write  20  per  cent,  off  plant.  25  per  cent,  off  horses,  and  value  the  lease 
at  $2,000.00.  The  profits  or  losses  are  to  be  equally  divided.  Dispensing 
with  interest  calculations,  draw  up  profit  and  loss  account  and  balance 
sheet,  and  in  particular  set  forth  in  the  latter  all  figures  affecting  the  re- 
spective capital  accounts.  Give  the  necessary  journal  entries,  including 
those  for  the  complete  closure  of  the  books,  in  terms  of  your  balance 

cl>UCi>Cii>l«* 

5.  What  do  you  understand  by  an  impairment  of  capital?  Where  such 
is  met  with,  does  it  follow  that  the  undertaking  is  in  a  bad  way,  and  if 
not.  illustrate  what  you  consider  a  justifiable  cause  for  such  impairment? 

332 


C.  p.  A.  Examination  Papers. 

6.  Give  in  your  own  words  what  you  understand  from  the  following: 
Preferred  Stock; 

Deferred  Stock; 
Ordinary  Stock; 
Debentures ; 
Mortgages. 

7.  A  set  of  books  have  to  be  closed  and  a  number  of  running  expense 
accounts,  such  as  insurance,  taxes,  advertising,  wages,  etc.,  contain 
amounts  that  are  properly  chargeable  against  the  next  year.  Would  you 
pass  journal  entries  for  these,  and  if  so,  give  them?  Would  reversing 
entries  be  required,  and  if  so,  give  them?  Explain  how  the  items  might 
be  dealt  with  in  the  books  without  the  need  of  journal  entries  at  all 
Which  do  you  think  is  the  better  course? 

8.  What  do  you  understand  by  "  writing  down  "  of  assets  and  "  writing 
up"  of  assets?  If  you  can  cite  any  instance  where  the  "writing  up"  of 
assets  is,  in  your  opinion,  justifiable,  how  would  you  suggest  that  such  be 
dealt  with  in  the  accounts? 

9.  Give  in  your  own  words  a  clear  description  of  bookkeeping,  and 
state  generally  the  reasons  why  all  who  are  engaged  in  business  should 
keep  books. 

10.  You  have  been  appointed  bookkeeper  to  a  wholesale  business,  the 
affairs  of  which,  owing  to  inefficient  keeping  of  accounts,  have  become  in- 
volved. Apart  altogether  from  systems  in  the  generally  understood  sense 
of  the  terrn  when  applied  to  bookkeeping,  can  you  state  two  fundamentals 
that  should  be  kept  clearly  before  you  in  evolving  a  satisfactory  set  of 
accounts  ? 


Bookkeeping-Practical  and  Thecretical-PaperlNo.  2. 

Time,  3^^  hours. 

I.    In  the  trial  balance  of  a  set  of  books  you  find  the  following: 
Depreciation ; 
Bad  Debts; 
.Suspense ; 

Bad  Debts  Suspense; 
Goodwill ; 

Profit  and  Loss  Account; 
Bills  Receivable  and  Payable; 
Depreciation  Fund; 
Preliminary  Expenses; 
Interest  Accrued; 
Reserve; 
Capital  Account. 

333 


I 

^ 


Accountancy  Problems  and  Solutions. 


f 


.«< 


Write  a  few  lines  describing  the  nature  of  each,  and  how  in  most  busi- 
nesses the  need  for  these  accounts  arises.  State  those  that  might  be  either 
debit  or  credit  balances,  and  if  debit,  what  does  it  betoken  ? 

2.  What  do  you  understand  by  the  phrase  "  the  account  is  in  credit." 
and  can  you  name  some  accounts  in  speaking  of  which  the  term  may  aptly 
be  applied? 

3.  Substituting  imaginary  figures  in  any  kind  of  business  at  all  that 
you  may  be  most  familiar  with,  submit  in  condensed  form  a  typical  trial 
balance,  profit  and  loss  account,  and  balance  sheet  of  the  business  or  un- 
dertaking selected. 

4.  How  may  a  trader  who  does  not  draw  up  trading  and  profit  and 
loss  accounts,  but  who  marshals  his  assets  and  liabilities  at  the  end  of 
each  year,  ascertain  his  annual  gain  or  loss?  Do  you  recommend  this 
course  of  ascertaining  profits,  and  if  not,  as  a  practical  bookkeeper,  point 
out  the  shortcomings  of  this  method. 

5.  What  do  you  understand  when  told  that  books  are  in  true  balance? 
In  your  own  words,  write  a  short  description  of  what  a  trial  balance  con- 
veys to  your  mind. 

6.  You  are  manager  of  an  agency  and  exchange  business  in  Costa  Rica. 
At  the  end  of  a  year's  operations  you  have  to  report  the  position  of  affairs 
to  your  principal  in  London,  who  handles  large  consignments  of  coffee, 
and  on  whom  much  of  the  sterling  paper  dealt  in  has  been  drawn.  The 
following  arc  the  balances: 

GOLD  BALANCES. 

Glyn,  Mills,  Currie  &  Co.,  f 5,000 $24^00.00 

Seaboard  National  Bank,  N.  Y 10,000.00 

Otis,  McAllister  &  Co.,  San  Francisco 8,000.00 

Alfred  Jones,  Capital  Account $59,ooaoci 

Balance  16,600.00 


$59,000.00    $59,ooaoo 


CUIUIENCY  BALANCES. 

Working  Expenses. $30,600.00 

Commercial   Bank 146,000.00 

Exchange   $310,000.00 

Advances  to  Coffee  Planters. 150,000.00 

Balance 16,600.00 


$326,600.00  $326,600.00 


^<3'w 


C.  p.  A.  Examination  Papers. 

The  net  gold  liability  being  $16,600.00,  provide  for  this  at  the  rate  of 
$2.00  currency  for  every  dollar  gold,  and  thereafter  draw  up  balance 
sheet,  grouping  properly  your  gold  and  currency  assets  and  liabilities, 
showing  on  profit  and  loss  account  the  amount  at  debit  or  credit  of  that 
account. 

7.  Give  in  your  own  words  some  of  the  uses  of  the  journal,  and  illus- 
trate with  three  or  more  typical  entries,  setting  forth  the  manner  in  which 
you  think  a  journal  entry  should  be  written  and  worded. 

8.  What  do  you  understand  by  controlling  accounts,  and  illustrate  from 
any  business  you  are  familiar  with  the  working  of  same,  stating  some  of 
the  advantages  from  the  use  of  such? 

9.  Draw  up  a  cash  book  where  controlling  accounts  are  kept,  and  give 
them,  and  in  addition  give  three  separate  headings  on  both  sides  of  the 
cash  book  for  incoming  and  outgoing  figures  that  are  of  frequent  occur- 
rence throughout  the  month.  What  advantages  are  derived  from  these 
columns  ? 

10.  You  have  been  called  upon  to  prepare  the  profit  and  loss  account 
and  balance  sheet  of  a  firm  of  architects.  The  only  reliable  book  appears 
to  be  the  ledger,  and  the  following  are  the  accounts  as  found  therein: 


PETER  SMITH. 


To  Plans,  etc $559-20     By  Cash 

To  Sundry  Cash  Outlays  By  Note 

on  his  behalf 8.75      By  Allowance. 


$75.00 

50.00 

750 


A.  JONES. 


To    Plans . 


$750.00     By  Allowance $37-50 

By  Cash 1^50 


E.  LOCKWOOD. 


To  Drawings 

To  Cash  for  Sundry  Out- 
lays    


$300.00     By  Allowance $25.00 

By  Cash 283.30 

8.30 


E.  BROWN. 


To   Plans   and    Specifica-  By   Cash, 

tions  for  Block $5»7So.oo 


$2,750.00 


To  Salaries. 


SALARIES  ACCOUNT. 

$1,570.00 

335 


I    I 


i;p 


Accountancy  Problems  and  Solutions. 

GENERAL  EXPENSES. 

To   Sundry  Expenses....     I430.00 


ToCash 


I  ••••*••••     r 


To  Deposits. 


BENT,  LIGHT,  ETC. 
$500.00 

Via  lurvr 

$3,270.80     By  Withdrawals, 


$2,517.05 


Prepare  one  summary  from  which  may  be  seen  the  totals,  both  as  to 
cash,  business  placed  on  the  books,  allowances  and  outstanding  balances. 
With  the  help  of  such  totals,  open  the  necessary  additional  ledger  accounts 
to  throw  the  ledger  into  balance.  From  the  resulting  trial  balance  (which 
give)  prepare  a  profit  and  loss  account,  seting  aside  5%  on  the  outstand- 
ing accounts,  and  draw  up  a  balance  sheet  showing  the  profit  or  loss  in 
equal  portions  on  capital  accounts  "A."  and  "B." 


Partnership,. 
Time,  3  hours. 

1.  A.,  who  was  formerly  the  general  manager  for  B.,  trading  under 
the  name  of  B.  &  Co.,  at  a  salary  of  $150  per  month,  entered  into  a  new 
agreement  with  B.  whereby  in  lieu  of  a  salary  he  was  to  receive  one-third 
of  the  profits  of  business.  B.  &  Co.  subsequently  became  insolvent.  Had 
the  creditors  of  B.  &  Co.  any  recourse  against  A.?    State  reasons. 

2.  If  a  partnership  is  formed  for  the  prosecution  of  an  illegal  business, 
will  the  Court  recognize  its  existence? 

(a)  By  enforcing  its  claim  against  others,  or 

(b)  By  compelling  either  partner  to  account  to  the  other  for  capital 
and  profits  in  his  hands,  or 

(c)  By  forcing  either  to  contribute  his  share  of  the  loss  to  the  other. 

3.  Has  one  partner  authority— 

(a)  To  make  an  assignment  to  the  official  assignee  of  the  firm  prop- 
erty without  the  knowledge  of  his  co-partner? 

(b)  To  bind  the  firm  property  by  chattel  mortgage  given  to  secure  a 
§im  debt  without  the  consent  of  his  co-partner? 

4.  (a)  Define  partnership. 

(b)  State  the  difference  between  co-owners  and  partners. 

336 


C.  P.  A.  Examination  Papers, 

5.  (a)  A.  and  B.  carry  on  business  under  the  name  of  X.  &  Co.  A. 
retires  from  the  firm  and  gives  no  notice  of  his  retirement.  The  old  cus- 
tomers who  knew  of  A.'s  connection  with  X.  &  Co.  continue  to  deal  with 
it  on  the  faith  that  A.  is  still  a  member  of  it.  Is  A.  liable  to  the  old  cus- 
tomers?   Give  reasons. 

(b)  Does  A.  incur  any  liability  to  new  customers  of  X.  &  Co.? 

(c)  Suppose  if,  on  A.'s  retirement,  C.  joined  B.,  and  B,  and  C.  carry 
on  business  as  X.  &  Co.,  and  the  old  customers  of  X.  &  Co.  go  on  deal- 
ing with  it  without  notice  of  A.'s  retirement  or  C.'s  admission,  can  an 
old  customer  maintain  an  action  against  A.,  B.  and  C.  jointly  for  a  debt 
contracted  by  X.  &  Co.  after  A.  retires,  or  can  he  elect  to  sue  A.  and  B. 
or  B.  and  C?    Give  reasons. 

6.  Can  an  infant  be  a  partner?  Whilst  he  is  an  infant  does  he  become 
responsible  for  the  debts  of  the  firm?  Can  a  judgment  creditor  of  the 
partnership  cause  an  execution  to  be  levied  against  the  infant's  share  in 
the  partnership  ? 

7.  If  a  member  of  a  partnership  becomes  insane,  is  he  responsible  for 
the  subsequent  misconduct  of  the  other  members?  Would  the  insanity 
of  a  partner  immediately  dissolve  a  partnership? 

8.  Where  a  firm  in  the  course  of  its  business  receives  money  belong- 
ing to  other  people  and  one  of  the  partners  misapplies  that  money  whilst 
it  is  in  the  custody  of  the  firm,  must  the  firm  make  it  good? 

9.  Does  the  person  who  is  admitted  as  a  partner  into  an  existing  firm 
become  liable  to  the  creditors  of  the  firm  for  anything  done  before  he 
becomes  a  partner? 

10.  (a)  Can  a  majority  of  the  partners  expel  any  partner  where  the 
partnership  agreement  is  silent  on  this  point? 

(b)  What  rights  have  the  legal  representatives  of  a  deceased  partner 
with  respect  to  the  management  of  the  partnership  affairs? 


Banking. 

Time,  3  hours. 

1.  What  class  of  securities  other  than  notes  and  drafts  will  a  bank 
make  advances  upon?    Name  three,  and  state  fully  the  nature  of  each. 

2.  A.  &  Co.  are  doing  a  large  country  business,  and  on  the  first  of  each 
month  make  thirty-day  drafts  upon  their  customers  for  the  previous 
month's  purchases,  some  of  which  are  accepted  and  paid  and  others  arc 

337 


t 


Accountancy  Problems  and  Solutions. 

refmcd.    All  drafts  are  deposited  with  the  bank  as  collateral  security  for 

Lt^'l"x   I-    ^T  *^'  ^°"  '^''"^  ^^"^^  ^  '^'  best  method  of  keep- 

ing  track  of  the  collateral  deposited  with  the  bank. 

3.  What  is  the  dlffereoce  between  inland  and  foreign  exchange? 

4.  What  is  the  difference  between  a  «  Demand  Draft"  a  "  Siirht  Draft " 
and  a  "Time  Draft"?    Give  one  of  each.  ^igm  uraft 

tJ'w^.Il  !nH  ^^^^fV"^"^^""^  of  a  promissory  note  for  $i,ooo  made 
by  K.  and  endorsed  by  D.,  B.  and  C  At  maturity  the  note  is  protested 
or  non-payment  Should  P.  sue  and  recover  from  C,  would  C  Save  any 
r«h  s  aganist  p.  and  B.?  If,  however,  P.  should  recover  from  D.,  what 
recourse  would  D.  have  as  against  maker  and  other  endorsers?  Give 
reasons. 

6.  Give  in  a  few  words  what  you  understand  by— 

(a)  Bailee  Receipt; 

(b)  Warehouse  Receipt; 

(c)  Letter  of  Hypothecation; 

and  in  what  way  are  these  used  in  obtaining  credit? 

7.  What  is  the  legal  rate  of  interest  in  Canada?  What  is  the  highest 
rate  of  mterest  banks  can  charge?  Under  the  Usury  Act  what  sle 
highest  rate  of  interest  that  can  be  collected? 

prlsf  Howlho'i?  '^''  «7;.«rtial  to  a  valid  protest  and  notice  of 
protest    How  should  notice  of  dishonor  be  given  and  within  what  time? 

fhf^  ^"  ^u^  ^^'^  ""^  ^  ^'■'"  '^^^"Sr  a  bank  for  advances,  if  the  members  of 
the  firm  have  accounts  with  credit  balances  with  the  firm's  tenk^rsc^n 
the  bank  apply  them  in  liquidation  of  the  firm^s  indebtedn^s?  H  not  ;h^? 

10.    If  a  note  or  a  draft  is  made  payable  to  a  particular  oerson  fnr  ^» 
ample.  "Pay  John  Smith  the  sum  of,  etc.,"  is  it  neSabl^  If 'sl^^^^^^^ 
can  It  be  made  not  negotiable?  s  u  negotiable.     If  so,  how 

u.    A  bill  is  payable  at  a  determinable  future  time- 
(a)  At  sight  or  at  a  fixed  period  after  date  or  sight; 

wh  ch  i?  certain  to  hf'  ^^t'  Tl  *'^  °'^""^"^^  ^^  ^  ^P^"^'  ^^^ 
wnicli  IS  certain  to  happen,  though  the  time  of  happening  is  uncertain 

wll  t  ^^r  "^''"  ^'  ^""^  ^'°°-  ^-  ^^^^^  the  draft,  payable  at  a  bank. 
When  the  bill  matures  the  bank  is  the  holder.  Is  pres^ntmen  necessa^^ 
If  80,  when  must  it  be  presented?  cniment  necessary? 


C.  P.  A,  Examination  Papers. 

13.  What  is  a  restrictive  endorsement?  Give  two  examples  of  re- 
strictive endorsements. 

14.  M.  draws  a  cheque  for  $500  in  favor  of  P.,  but  the  next  day  he 
discovers  that  it  should  have  been  for  $450,  and  requests  the  bank  to  stop 
payment.  P.  in  the  meantime  has  presented  the  cheque  and  had  it 
marked.  Can  the  bank  refuse  payment  or  must  it  pay  the  cheque?  Give 
reasons  for  your  answer. 


Company  Law. 
Time,  3  hours. 

1.  (a)  Under  the  Manitoba  Joint  Stock  Companies  Act,  what  per- 
centage of  the  capital  stock  of  a  company  must  be  subscribed  and  what 
percentage  of  the  stock  subscribed  must  be  paid  before  the  company  may 
commence  business? 

(b)  What  percentage  of  the  allotted  stock  of  a  company  must  be  called 
in  within  one  year  from  the  company's  incorporation? 

2.  Under  the  Manitoba  Act  what  voting  power  is  possessed  by  a  share- 
holder? 

3.  A  company's  earnings  for  a  year  would  enable  it  to  declare  a  divi- 
dend of  ten  per  cent  The  directors  decline  to  declare  a  dividend,  wishing 
to  employ  the  profits  in  extending  business,  and  a  majority  of  the  stock- 
holders agree.    Can  the  dissenting  shareholders  obtain  interference  at  law? 

4.  A  by-law  of  a  company  empowered  to  carry  on  a  general  mercantile 
business  provides  that  the  company  shall  not  enter  into  a  contract  where 
the  amount  involved  is  over  $1,000  unless  same  is  approved  by  a  majority 
of  the  directors.  The  managing  director  orders  goods  for  a  larger  amount 
Is  the  company  bound  in  the  absence  of  such  approval  where  the  seller 
is  ignorant  of  the  by-law? 

5-  (a)  Keeping  in  mind  Section  46  of  the  Manitoba  Act,  which  pro- 
vides that  each  shareholder,  until  the  whole  amount  of  his  stock  has  been 
paid  up,  shall  be  individually  liable  to  the  creditors  of  the  company  to  an 
amount  equal  to  that  not  paid  thereon,  may  a  company  sell  its  shares  as 
fully  paid  up  at  less  than  the  par  value  thereof? 

(b)  What  provision  is  in  the  Alberta  Act  as  to  selling  shares  at  a 
discount  ? 

339 


Accountancy  Problems  and  Solutions, 

6,    May  a  company  incorporated  to  carry  on  a  general  trading  business 
acquire  and  mortgage  real  estate  for  the  purpose  of  its  business  ? 

'Jlu  ^r'°"  ^  °f  ?^  Manitoba  Act  prohibits  a  company  from  engaging 

Ife!  sh^s'L  a  bal  T     ""k""  T'"  ^  '^-^^"'  ^^^  ^^^^^"^  '-- 
cnases  sftares  m  a  bank.    Is  such  purchase  valid? 

fi^  n^^-  ^  P^'^^^^^^fP*  ^  P^«««nt  of  shares  in  a  company  in  considera- 
tion of  his  joining  the  board  of  directors? 

9-    Directors  of  a  company  indorse  its  note  to  enable  it  to  make  a  loan. 

InlT  'V        ^^^!  ^''^  ^"^°"^'-    ^'  ^^  ^"^^'*^d  to  full  indemnity 
from  the  subsequent  mdorsers? 

la    May  an  application  for  shares  in  a  company  be  withdrawn  before 
the  company  sends  him  notice  of  allotment? 

II.  The  promoters  of  a  company  before  its  incorporation  emolov  an 
accountant  to  prepare  its  prospectus,  which  the  company  makes  use  of 
May  he  recover  for  his  services  against  the  company? 

12  Argue  for  or  against  the  right  of  a  company  that  is  in  debt  paying 
dividends  out  of  profits.  P^^ymg 


Final. — ^Auditing. 

Time,  3  hours. 

voLhl^l"^  r"  '°"'^*'''^  '*^'^"*^'  '"^^^  P^y^^^«  *°  o'-d^^  sufficient 
Ztr  u  ^'''"''"'  °'  ''"*^*^  ^"°""^^?  "  "°''  «"^-^  what  circum- 
^7^Zu?    '°"  ''''''  '"'^  ^'^""^^  ^^  "°"*^'^^^'  ^"^  ^-^  -hat  class 

r.L^!!!!*^  K  "T^^  ^'''P^'"*^  statement  of  receipts  and  payments  be 
tht  w^H  K^-    ',f?-'°';  Of  -  trading  company  to  ascertain  whethe^ 

.l.n„lJ"i!^  *'^'!  °^^  '"^""facturing  company  what  classes  of  expenditure 
Should  enter  into  the  manufacturing  or  trading  account,  and  what  m[o 
the  profit  and  loss  account? 

temuiiiiig  what  are  the  «  Divisible  Profits  "  of  a  company. 

340 


C.  p.  ^.  Examination  Papers. 

5.  At  the  close  of  the  year  you  are  unable  to  attend  at  the  office  of  a 
company  you  are  auditor  for  to  count  the  cash  in  hand.  What  steps 
would  you  take  to  enable  you  to  certify  to  its  correctness? 

6.  What  methods  would  you  adopt  for  the  verification  or  confirmation 
of  the  following  items: 

(a)  Stock  Sheets  apd  Material  on  Hand; 

(b)  Book  Debts; 

(c)  Investments. 

Would  you  be  justified  in  accepting  certificates  from  the  managing  direc- 
tor, manager  or  other  official  as  to  their  correctness? 

7.  What  is  the  object  of  crediting  the  partners  of  a  firm  with  interest 
on  their  capital  before  ascertaining  the  profits  divisible  between  them? 

8.  In  examining  the  securities  (of  a  company  you  are  auditor  of) 
which  consist  of  inscribed  stocks,  certificates  for  shares  and  bills  receiv- 
able, what  would  be  your  procedure,  and  what  main  object  would  you 
have  in  view? 

9.  Would  you  consider  that  entries  in  the  directors'  minute  book  of 
a  company  were,  in  all  cases,  sufficient  authority  for  you  to  approve  all 
payments  or  transactions  mentioned  therein?  If  not,  state  some  ex- 
ceptions. 

10.  Under  what  circumstances  would  an  auditor  of  a  company  be  jus- 
tified in  refusing  to  give  any  certificate  whatever  to  a  balance  sheet? 

11.  Among  the  assets  on  the  balance  sheet  of  an  engineering  firm 
whose  accounts  you  are  auditing  you  find  an  item  of  "  Work  in  Progress, 
$125,000."  What  steps  would  you  take  to  verify  the  correctness  of  this 
amount  ? 

12.  What  is  a  "  Secret  Reserve  "  ?  Give  three  examples,  showing  how 
secret  reserves  can  be  formed. 


Advanced  Bookkeeping  and  Accounts. — First  Paper. 

Time,  3  hours. 

I.  From  the  following  trial  balance  of  the  Atlas  Manufacturing  Com- 
pany, Limited,  compile  balance  sheet  and  profit  and  loss  account  as  at  the 
31st  December,  1909,  in  the  form  you  would  advise  the  company  to  adopt: 

First  Call  on  Stock I500 

Second   Call   on   Stock 700 

Winnipeg   Trust   Company    (Debentures   Deposited  as 

Security  for  Loan,  part  of  $100,000  issued) 20,000 


Accountancy  Problems  and  Solutions. 


I  H, 


M 


Preliminary  Expenses 

Property  and  Plant .']  ' 

l&chinery  and  Goodwill .'..,* 

New  Property  and  Improvemms. .*.'.' ] 

Interim  Dividend  Paid 

Inventory   of  Stock .......**''* 

Accounts   Receivable '**.,..'.. 

Interest  on  Loan  and  DebentiiVeV 'to 'jis^  December 
1900  ' 

Bank  Account 

Cash  on  Hand .    

Capital,  2,000  Shares  of  $ioo'eadi.\** 

Debentures   ....... !T...". 

Winnipeg  Trust  Company  Loan. " 

Accounts  Payable '* 

Premium  on  Shares .  

Trading  Account 

Reserve  for  Discounts  and  Bad  Debts. 

Profit  and  Loss  Account,  after  paying  *  Divi'dend '  ist 
January,  1908 


3,000 

200,000 

50,000 

50,000 

9,940 

10,500 

5,000 

4,500 

21400 

560 


$200,000 
100,000 

15,000 
6,500 
3,500 

50,000 
600 


$376,100  $376,100 

Have  you  any  criticism  to  make  in  regard  to  the  trial  balancIT 
by'the'^fbLwtg:'  ^'"^  °"  "^  ^^""*^'  '^'  --  $50,000,  represented 


Loans 


Liabilities, 


$12,500 


Accounts  Payable 5^000 


were: 


Assets. 
Cash  in  Bank....  trrfi**!- 

Mock  m  Hand  ii>>n.r»> 

xxmju 35,000 

Fixtures _,        g^c 

Warehouse 10,000 

Accounts  Receivable ...     10,000 

During  the  year  1909  their  transactions 

Goods  Bought 

Goods   Sold ..]......[. $62,000 

Paid  for  Goods  by  Cheque    80,000 

p^Tn'r  ^'T 1'^,"  °^  ^"iJ^sit'edinBai:. ■.■;:; :;:;;; H"^ 

Faid  Cash  for  Salaries. ...  /2,500 

^1?^. '"'  i?'".''  '^^"-  ^»8''  "a^doffi^'  ExpenUs.' .'  :;::■■■■  ''^ 

iJrawn  out  m  Cash  by  M ^'^^ 

Drawn  out  in  Cash  by  B. ''^*** 

Paid  Cash  for  Traveling  Expenses ^^^ 

Paid  ash  for  Freight  on  Goods....*.*.'."; ^00  . 

Discount  Allowed  on  Sales ''^oo 

2,000 


C.  p.  A.  Examination  Papers. 

Discount  Received  from  Purchases 1,5^3 

Goods  Returned  by  Customers 1,250 

Goods  Returned  to  Manufacturers 1,500 

Paid  off  Loan  and  Interest  by  Cheque 13,125 

Paid  Cash  for  Repairs  to  Warehouse 250 

Bank  Interest 250 

Bank  Commission loo 

Cheques  Drawn  on  Bank  to  make  Cash  Payments 11,000 

Stock  on  hand  at  the  end  of  the  year  amounted  to  $33,750,  and  they 
owed  $150  for  freight  and  $562  for  rent  and  taxes.  Unexpired  insurance 
amounted  to  $188.  Allow  for  discount  on  accounts  receivable  $200  and 
$125  on  accounts  payable.  No  interest  on  capital  or  partners'  salaries  was 
to  be  charged,  and  profits  were  to  be  shared  equally.  Make  trial  balance 
as  at  December  31,  1909,  and  prepare  trading  and  profit  and  loss  accounts, 
capital  accounts  and  balance  sheet. 

3.  Brown  and  Jones  have  dry  goods  stores  near  each  other.  They  de- 
cide that,  by  amalgamating  their  business  and  forming  a  joint  stock  com- 
pany, they  can  do  a  larger  and  more  profitable  business  at  less  expense. 
Both  have  kept  their  books  by  single  entry.  You  are  called  in  to  give  the 
necessary  statements  to  enable  them  to  ascertain  how  they  stand  and  to 
open  the  books  of  the  Brown-Jones  Company,  Limited.  You  find  the  fol- 
lowing accounts  in  the  ledgers,  viz.: 


Brown's  Ledger. 

Balances  as  at  the  ist  August,  1909. 

Cash  on  Hand $250 

Bank  Balance 5,400 

Cash  Sales 

Book  Debts 25,000 

Bills  Receivable 3^000 

Store  and  Land 30,000 

Fixtures 2^000 

Wages  and  Expenses 4,000 

Accounts    Payable 

Bills   Payable ....!..!..]!!].]!.!...! 

Brown's  Drawings 10,000 

Freight,  Duty  and  Cartage g.ooo 

Inventory  of  goods,  $8,700;  unexpired  insurance,  $200. 

Jones*  Ledger. 

Balances  as  at  the  ist  August,  IQ09. 

Cash  on  Hand ^^ 

Bank   Balance « -qq 

Cash  Sales .*.'.'.*.'.'.*.' .'..7. ".*.." '.".'.'.". 

343 


$10^000 


6,000 
2,550 


$12,000 


$5,000 
3.000 


Accmtnioncy  Problems  and  Solutions, 

Stores  and  Land ■  •  • ■ ■  -  •  ■ ■ $25*000 

Fixtnres  ■  •  •  •  ■ ■ '  •  ■ ■ i»500 

WW affcs   ,,,,,•»»••••••••#••••••■••■•••••••••••••••"•***•'■      ' 

Jones'  Personal  Account ^'O^o 

Expenses 1.500 

Book  Debts ^S-ooo 

Bills  Receivable. ^'°°*' 

Freight,  Duty  and  Cartage. 5,000 

Accounts  Payable 

Bills   Payable  .••.•••••••••••••••••••••••••••..•.•..•.•... 

Inventory  of  goods,  $5,800;  unexpired  insurance,  $100. 

The  capital  of  the  company  is  to  be  $150,000,  in  shares  of  $100  each,  of 
which  Brown  is  to  take  $70,000  and  Jones  $50,000.  If  the  capital  invested 
in  the  business  of  either  exceeds  these  sums  then  they  are  to  receive  the 
surplus  in  cash,  but  if  it  is  less  then  they  are  to  pay  in  the  difference  in 
cash.    The  balance  of  the  stock  is  subscribed  and  paid  for  in  cash. 

Make  necessary  changes  in  Brown's  and  Jones'  ledger  balances  to  show 
standing  of  firms  and  capital  invested,  and  give  trial  balance  from  com- 
pany's ledger  after  opening  entries  have  been  made. 

4.  A.  and  B.  are  partners  in  a  business  in  which  each  has  invested 
$15,000.  They  decide  to  take  in  a  new  partner,  C,  who  is  to  put  in  $15,000 
as  his  capital  and  in  addition  pay  $2,000  for  goodwill.  State  the  different 
ways  in  which  the  sum  paid  for  goodwill  may  be  treated.  Which  method 
do  you  consider  the  more  correct?    Give  your  reasons. 

5.  M.  and  N.,  general  merchants  at  Reaburn,  make  an  assignment  for 
the  benefit  of  their  creditors,  and  you  are  requested  by  the  assignee  to 
prepare  a  balance  sheet,  statement  of  affairs  and  deficiency  account.  You 
ind  from  the  ledger  that  the  assets  and  liabilities  are  as  follows: 


Cash  in  Hand .....  $Soo 

Book  Debts 7*000 

Store  and  Land i5»ooo 

Farm  Lands 10,000 

Store  Fixtures 400 

Inventory. 

Hardware $3,000 

Groceries 2,500 

Dry  Goods, ...... . . .    4,000 

Boots  and  Shoes...    1,100 


Liabilities. 

Bills    Payable 

Accounts  Payable 

Mortgage  on  Farm  Lands. 
Mortgage  on  Store....... 

N.  Capital 


$8,000 
6,000 
5,000 
8,000 

12,000 
8,000 


*s  Drawings. 


,P.*s   Drawings 


$10,600 

2)100 
1400 

$47,000 


m 


\i 


C.  P.  A.  Examination  Papers. 

On  a  valuation  of  the  assets  being  made,  it  is  found  that  of  the  book 
debts  $4,000  are  good,  $2,000  doubtful  and  $1,000  bad,  and  in  order  to  be 
on  the  safe  side  10  per  cent,  is  to  be  deducted  from  the  good,  40  per  cent, 
from  the  doubtful  and  the  bad  are  not  to  be  taken  in.  The  store  and  land 
are  valued  at  20  per  cent,  and  the  farm  lands  at  10  per  cent,  less  than 
they  stand  at  in  the  ledger,  the  fixtures  are  only  worth  60  per  cent,  on  the 
dollar  and  the  inventories  are  to  be  reduced  as  follows :  Hardware  10  per 
cent.,  groceries  15  per  cent.,  dry  goods  30  per  cent,  and  boots  and  shoes 
25  per  cent.  M.  has  property  valued  at  $1,000  and  N.  has  no  assets  outside 
of  the  partnership.    Give  statement  of  affairs  and  deficiency  account 


$47,000 


Advanced  Bookkeeping  and  Accounts. — ^Second  Paper. 

(o)  Trustees'  and  Executors*  Accounts. 
Time,  3  hours. 

1.  Explain  the  difference  between  an  executor  and  administrator,  and 
state  by  whom  each  is  appointed. 

2.  What  are  the  first  duties  of  an  executor  or  administrator  after  the 
probate  of  the  Will  or  Letters  of  Administration  have  been  granted? 

3.  Unless  otherwise  authorized  by  the  will,  in  what  securities  must 
the  executor  invest  the  moneys  intrusted  to  him? 

4.  A  corporation  issues  lo-year  bonds  to  the  amount  of  $50,000.00,  se- 
curing same  by  a  mortgage  on  its  property,  which  is  placed  in  the  hands 
of  a  trust  company.  The  trust  deed  provides  for  the  establishment  of  a 
sinking  fund  to  retire  the  bonds  at  maturity  and  that  equal  annual  pay- 
ments be  made  on  the  ist  of  January  in  each  year.  Give  the  amount  of 
this  annual  payment,  interest  compounded  at  6%? 

5.  In  the  estate  of  a  certain  testator  the  amount  of  cash  on  hand  after 
paying  all  bequests  is  $10,000.00.  This  the  executor  invests  as  follows,  as 
at  January  i,  1909:  $5,000.00  in  first  mortgage  on  real  estate  valued  at 
$9,000.00,  bearing  interest  at  6% ;  1,250  shares  La  Rose  Gold  Mine  Stock 
at  $4.00  (par  value,  $5.00),  dividends  at  3%  per  quarter,  payable  January 
31st  and  April  30th. 

On  May  31st  he  sells  the  1,250  shares  at  $3.00  and  invests  the  proceeds, 
together  with  dividends  paid,  in  20  shares  Bank  of  Hamilton  Stock  at 
205,  paying  commission  and  brokerage  charges  of  $25.00.  On  September 
30th  he  sells  the  20  shares  Bank  of  Hamilton  Stock  at  220  and  invests  the 
proceeds  in  first  mortgage  on  real  estate  valued  at  $7,000.00,  bearing  inter- 
est at  6%,  payable  quarterly. 


345 


II 


m 


Accountancy  Problems  and  Solutions. 

Give  executor's  profit  and  loss  account  as  at  December  31  igoo  and 
show  position  of  estate  at  that  time,  payments  of  interest  on  'both  mort- 
mtS^  mwrng  been  made. 

(b)  Cost  Accounts. 

I.  Explain  the  uses  of  a  cost  accounts  system  and  state  the  advantages 
to  a  company  employing  such  a  system  over  a  company  basing  their  costs 
on  tlic  profit  and  loss  account  at  the  end  of  the  year. 


Give  definitions  of  the  following: 

Prime  Cost; 

Laid  Down  Cost; 

Gross  Profit; 

Productive  Labor; 

Machine  Cost 


3» 


What  is  your  interpretation  of  indirect  or  overhead  expenses? 


4.  In  a  manufacturing  company  employing  a  cost  accounts  system  what 
disposition  would  you  make  of  the  following: 

Depreciation  on  Plant; 

Depreciation  on  Goodwill; 

Depreciation  on  Stock; 

Depreciation  on  Accounts  Receivable; 

Depreciation  on  Factory  Property. 

5.  State  briefly  the  duties  of  an  auditor  in  connection  with  the  cost  ac 
counts  system  in  auditing  the  books  of  a  manufacturing  company  employ- 
ing such  a  system.  ^        ^  ^  empioy 


Joint  Stock  and  Partnership  Accounts. 

Time,  3  hours. 

Ji  f  .T^^"^  *l  ^""I"^^^  "^'^^  ^  "^^'^^^  °^  ^'«^'«»'  »'n  shares  of  $100 
each, ;«  t^fee  o^^^  the  busmess  of  A.,  B.  &  Co.  The  assets  to  be  acquired 
arc     (I)  buildings,  $30000;  (2)  machinery,  $18,000;   (3)  stock.  $20,000. 

^l  Z"^Tr  *!:  *:^»r.^^«  ^^^  d^^^«  and  discharge  the  liabilities. 
fnirZ  ^  Pa^d  inclusive  of  goodwill,  is  fixed  at  $80,000,  payable  as 
^  $50,000  m  cash  and  as  to  the  balance  in  fully  paid  shares  of  the  com- 

Cl.  /'°'^'^*"'t''  'f'"'"^  ^'^^^""^  700  shares  to  the  public,  payable 
te  per  share  on  apphcation  and  $50  on  allotment;  600  shares  are  applied 

Z^Vj^sV^^^  ist  February,  1910,  on  which  date  the'ven- 

for  sumnLIf  I  ''^:     ^'^''''^  ^*^'°""*^  ^'^  ^^P^  ^y  the  bank 

for  sums  payable  on  application  and  allotment.    On  28th  Februarv  the 

ainoiiiits  due  on  alotment  had  been  paid  on  500  shares,  and  on  that  date 


C.  P.  A.  Examination  Papers, 

the  sums  at  credit  of  the  bank  accounts  were  transferred  to  a  general 
bank  account  and  a  cheque  drawn  in  favor  of  the  vendors  for  $30,000  to 
account.  Prepare  entries,  in  journal  form,  recording  these  transactions 
in  the  books  of  the  company,  and  show  the  various  ledger  accounts. 

2.  Prepare  a  balance  sheet  as  at  31st  December,  1909,  of  the  Winnipeg 
Manufacturing  Company,  Limited  (which  may  be  engaged  in  any  form  of 
manufacturing  you  please).  Insert  figures  for  all  the  usual  items  for  the 
business  you  select,  showing  in  particular  the  following  items,  or  such  of 
them  as  you  think  should  appear  on  the  balance  sheet: 

Capital  authorized,  subscribed  and  paid  up; 

Amount  of  calls  in  arrears ; 

Amounts  received  in  respect  of  forfeited  shares  reissued: 

Amounts  received  in  respect  of  forfeited  shares  not  reissued; 

Contingent  liability  in  respect  of  bills  receivable  under  discount; 

Liability  in  respect  of  cumulative  preference  dividend  which  has  been 
passed  for  the  last  two  years ; 

Reserve  not  specially  invested. 
State  briefly  the  arguments  in  favor  of  your  method  of  treatment  of  the 
above  items. 

3.  A  company  borrows  $120,000  for  a  period  of  ten  years  to  pay  off  an 
existing  loan  at  higher  rate  of  interest,  paying  in  connection  therewith  in 
brokerage  and  costs  $2,500.  State  briefly  how  you  would  treat  this  item 
of  $2,500,  giving  your  reasons. 

4.  (a)  Outline  the  duties  of  the  secretary  of  a  limited  company  in  con- 
nection with  the  transfer  of  the  company's  shares. 

(b)  Give  rulings  for  a  simple  form  of  transfer  register  and  stock  ledger. 

5.  A.  and  B.  are  partners,  sharing  profits  and  losses  in  proportion  to 
their  capitals,  which  are:  A.,  $21,000;  B.,  $14,000 — as  brought  out  in  the 
balance  sheet.    They  assume  C.  as  partner  on  condition — 

(a)  That  he  accepts  the  balance  sheet  as  correct,  $5,000  to  be  inserted 
for  goodwill  and  added  ratably  to  the  capital  of  A.  and  B. 

(b)  That  he  pays  cash  into  the  new  firm  sufficient  to  give  him  one- 
fifth  share  of  the  whole  business,  the  ratio  of  A.'s  capital  to  B.'s  remain- 
ing unchanged. 

Show  the  entries  required  to  record  these  transactions  and  the  capital 
account  of  each  partner  as  it  will  stand  after  the  transactions  are  carried 
through.  Show  the  amount  of  cash  paid  in  by  C,  and  state  in  what  pro- 
portions each  partner  shares  in  the  profits  and  losses  of  the  new  firm. 

6.  Brown  and  Black  are  partners  carrying  on  a  business  in  Winnipeg. 
On  31st  December,  1909,  after  adding  profits  for  the  past  half  year, 
Brown's  capital  amounted  to  $15,000  and  Black's  to  $10,000.  On  that  date 
they  take  into  partnership  Green,  upon  the  following  terms,  viz.,  he  is  to 
bring  in  capital  amounting  to  $2,500,  and  each  partner  is  to  be  credited 

347 


?! 


Accountmcy  Problems  and  Solutions, 

with  interest  on  his  capital  at  s%  per  annum.  All  profits  (after  debiting 
interest)  up  to  $5,000  are  to  be  shared  by  Brown  and  Black  exclusively  in 
proportion  to  the  amounts  of  their  capital  at  31st  December,  1909.  All 
profits  in  excess  of  $5,000  are  to  be  shared  equally  by  the  three  partners. 
Accounts  are  to  be  prepared  and  profits  and  interest  credited  half-yearly. 
Green  is  to  be  credited  with  a  salary  of  $1,000  per  annum.  On  30th  June* 
1910,  the  profits  divisible  after  debiting  Green's  salary,  which  he  has  drawn' 
but  before  charging  interest  on  partners*  capital,  amounted  to  $7,500.  The 
partners'  withdrawals,  which  are  not  chargeable  with  interest,  were:  Brown 
$2,500,  Black  $2,000  and  Green  $750.  Draw  up  partners'  separate  accounts 
as  they  should  stand  on  July  i,  1910. 

The  partnership  agreement  does  not  make  any  mention  of  what  is  to  be 
done  if  the  profit  and  loss  account  shows  a  loss.  Suppose  that  that  the 
above  $7,500  had  been  a  loss  instead  of  a  profit.  State  briefly  how  you 
would  have  treated  it  and  give  a  reason  for  your  answer. 

7.  You  are  called  in  by  two  or  more  persons  contemplating  partner- 
ship to  meet  their  lawyer  and  consult  with  him  as  to  the  clauses  to  be 
inserted  in  the  partnership  agreement  in  connection  with  the  keeping  of 
the  partnership  accounts  and  the  financial  relationships  of  the  partners. 
Mention  any  points  which  occur  to  you  which  you  would  suggest  being 
provided  for  to  make  the  agreement  as  satisfactory  as  possible  from  an 
accountant's  point  of  view. 

8.  You  are  requested  by  a  firm  carrying  on  business  in  Winnipeg  to 
supervise  their  bookkeeper  in  the  writing  up  of  the  partnership  books. 
You  find  that  A.  had  $10,000  at  his  credit  at  the  date  of  the  last  balance 
Sheet  and  that  this  has  since  been  reduced  to  $8,000.    You  also  find  that 
lie  has  been  receiving  a  share  of  the  profits.    You  are  told,  however,  that 
lie  is  not  a  partner  and  that  the  $8,000  is  to  be  treated  as  a  loan. '  Can 
tils  be  the  case,  and  if  so  how  would  you  expect  to  find  that  A.  had  pro- 
tected himself  from  the  risk  of  being  treated  as  a  partner  in  the  event 
of  the  insolvency  of  the  firm?    In  the  case  of  such  insolvency  would  A's 
position  diflfer  from  that  of  an  ordinary  lender,  and  if  so,  in  what  way? 
If  A.  had  been  a  limited  partner,  could  he  legally  have  made  the  above 
feduction  in  the  amount  at  his  credit,  and  if  not,  what  would  you  have 
advised  on  finding  that  he  had  done  so?    Give  reasons  for  your  answer. 


C.  P.  A.  Examination  Papers, 

2.  Where  a  debtor  refuses  to  make  an  assignment  for  the  benefit  of  his 
creditors  have  the  creditors  any  means  of  forcing  him  into  liquidation? 

3.  A  debtor  making  an  assignment  has  a  burdensome  lease  and  shares 
in  a  bank  which  is  being  wound  up  and  to  which  double  liability  attaches. 
Is  the  assignee  obliged  to  take  these  over  with  the  rest  of  the  assets? 

4.  Is  it  necessary  that  an  assignment  for  benefit  of  creditors  under  the 
act  be  registered  in  order  that  it  may  be  valid? 

5.  May  one  partner  make  an  assignment  for  the  benefit  of  the  firm's 
creditors? 

6.  What  remedy  has  the  assignee  or  creditors  to  compel  the  assignor 
to  make  disclosure  as  to  his  assets  and  affairs  of  his  estate? 

7.  If  an  assignee  before  distribution  has  notice  of  a  claim,  but  the 
creditor  has  failed,  though  notified  to  do  so,  to  put  in  proof  of  claim,  may 
the  assignee  distribute  the  estate  without  regard  to  the  claim? 

&  Is  a  payment  of  money  by  a  debtor  to  his  creditor  open  to  attack  as 
a  fraudulent  preference? 

9.  A  debtor  executed  a  chattel  mortgage  in  favor  of  a  money  lender  in 
consideration  of  a  present  cash  advance,  which,  to  the  money  lender's 
knowledge,  was  intended  to  be  and  was  paid  to  a  creditor.  Is  the  chattel 
mortgage  valid  as  against  the  other  creditors? 

10.  A  solvent  trader  sold  his  business  to  a  company  consisting  of  him- 
self, his  wife,  two  sons  and  a  daughter,  he  holding  all  the  shares  but  six. 
In  part  payment  of  the  purchase  money  the  company  gave  to  him  deben- 
tures charging  all  the  company's  property,  both  present  and  future.  The 
company  went  into  liquidation.  After  paying  the  debentures  there  was 
nothing  left  to  pay  creditors,  including  creditors  of  the  trader.  Is  the 
transaction  between  the  trader  and  the  company  valid  as  against  his 
creditors  ? 


Com: 


mercia 


IL 


aw. 


.Assigmneiits. 

Time,  3  hours. 

1.  A  trader  in  insolvent  circumstances  sold  his  stock  in  trade  and  de- 
posited the  purchase  money  to  the  credit  of  his  account  in  the  bank.  At 
the  time  an  overdue  note  of  his  was  held  by  bank  and  he  gave  the  bank 
a  cheque  to  cover  same.  Is  such  payment  a  preference  and  void  as  against 
Itis  creditors? 


Time,  3  hours. 

I.  A.  wrote  on  September  2d  offering  to  sell  wool  at  a  certain  price 
to  B.  and  asked  for  an  answer  in  the  course  of  post.  The  letter  only 
reached  B.  on  the  7th,  who  accepted  at  once.  Before  A.  received  the  ac- 
ceptance he  had  already  sold  the  wool.  What  right  has  A.  against  B.? 
Would  it  make  any  difference  to  your  answer  if  the  letter  had  reached  B. 
on  the  3d,  and  he  had  answered  at  once,  but  his  letter  of  acceptance  had 
never  reached  A.? 


348 


349 


Accountancy  Problems  and  Solutions. 


C.  P.  A.  Examination  Papers. 


!lll> 


r 


I 

iii 


J\^  If,.^^*^^"*'*^*^*  ^^^^  binding  without  consideration?    If  so,  when? 
(c)  Without  other  consideration,  when  is  a  smaller  sum  ever  satisfac- 
tion of  a  greater?  »«i«M«ic 

3  A.  being  in  financial  difficulties,  his  creditors,  with  the  exception  of 
f;;r!fr'  ''"^'  fi%  cents  on  the  dollar.  As  an  inducement  to  B.,  A. 
secretly  agrees  to  give  him  seventy-five  cents.    B.  accepts.    What  rights 

talf  ctfonT     •'  '"*^  ^**''  '^'''  ^°^^  *^'^  ^°^*^^^t  h-ve  on  the  whole 

4.    Corporations  have  a  limited  capacity  to  contract 

(a)  Why? 

(b)  When  can  a  corporation  bind  itself  on  a  bill  of  exchange?    Must 
the  corporate  seal  be  attached? 

(c)  Generally,  is  the  corporate  seal  necessary  in  contracts  by  cor- 
porations?  -^ 

Jn.  ^^f  "^"^^\*^^  P°«it^°"  «f  a  bom  Me  holder  of  a  negotiable  instru- 

ZhL  for  th"i  ''''^"'!-  "^^  T-  ''''^^**^'  ^^^^^"*^°"  ^"  ^^^^  ^^^"^  °f  their 
suing  for  their  respective  claims. 

^K.  wi,^^'*  ''  '  "^^"  ^^  Lading"?    Is  it  negotiable? 
(b;  What  is  meant  by  "stoppage  in  transit"? 
(c)  When  is  the  right  defeated  ? 

7-     (a)  What  is  a  "  del  credere  agent "  ? 

(b)  Is  the  principal  liable  for  an  agent's  fraud?    If  so,  when? 

Jhf  ^^^'  T  "^7^t^"sti«  of  a  "  common  law  lien  "?    How  is  the 
right  acquired  and  how  lost? 

lenderT^''  ""''  '^'  ''*'"''^'''  ""^  '  ^'^'*^  ''"^''-     ^^^*  ^'^  ^^^^^ian  legal 

10.    B   verbally  agrees  to  buy  a  motor  car  for  $1,500  from  A     B   re- 
fuses to  take  delivery  of  the  car.    What  rights  has  aT 


The  State  Board  of  Accountancy  of  Virginia. 

Examination  in  Auditing. 

November  1 7,  1910— 1.30  P.  M.  to  5.30  P.  M. 

Answer  twelve  (12)  questions,  but  no  more.  Do  not  repeat  questions, 
but  write  answers  only,  designating  the  questions  by  number. 

1.  Give  a  brief  outline  of  the  duties  and  responsibilities  of  an  auditor. 

2.  In  auditing  cash  payments,  how  would  you  prevent  the  reproduc- 
tion and  passing  of  vouchers  a  second  time? 

3.  In  auditing  the  accounts  of  a  corporation  for  the  first  year  of  ttf 
existence,  what  records  and  documents  should  be  examined,  in  addition 
to  the  books  of  account  and  the  vouchers? 

4.  If  you  had  not  been  present  to  count  the  cash  actually  on  hand  at 
the  date  of  the  balance  sheet,  how  would  you  afterwards  verify  its  cor- 
rectness ? 

5.  How  would  you  reconcile  the  balance  shown  by  the  bank  settlement 
in  the  pass  book  with  the  balance  shown  by  the  check  book  or  cash  book? 
Having  done  this,  is  it  necessary  to  check  the  deposits  shown  in  the  past 
book  with  the  receipts  shown  in  the  cash  book? 

6.  In  preparing  the  balance  sheet  of  a  corporation,  how  would  you 
treat  arrears  of  "cumulative"  dividends  on  preferred  stock? 

7.  To  what  extent  is  it  permissible  to  carry  as  an  asset  the  "organ- 
ization expenses"  of  a  corporation? 

8.  To  what  extent  do  you  consider  it  necessary  to  verify  the  following: 
(o)  Inventories;  (b)  Pay  rolls;  (c)  Discounts;  (d)  Depreciations. 

9.  Give  a  full,  detailed  account  of  your  procedure  in  auditing  the  cask 
account  of  a  large  mercantile  corporation. 

10.  In  auditing  the  books  of  a  concern  whose  accounts  receivable  are 
kept  in  one  or  more  subsidiary  ledgers,  with  a  proper  controlling  account 
in  the  general  ledger,  what  verification,  if  any,  would  you  make  of  such 
accounts  ? 

11.  State  how  you  would  verify  the  following:  (o)  Purchases;  (b) 
Returned  purchases;  (c)  Sales;  (rf)  Returned  sales;  ^e)  Cash  receipts; 
(/)  Cash  payments;  {g)  Journal  entries. 

12.  State  briefly,  and  in  order  of  procedure,  the  different  steps  to  be 
taken  in  a  bank  examination. 

13.  State  your  method  of  procedure  in  auditing  the  accounts  of  a  build- 
ing and  loan  association. 


350 


351 


I   '  '■ 


Accountancy  Problems  and  Solutions, 
14  Define  and  differeetiate  capital  expenditure  and  revenue  cxoendi. 

15.  In  the  case  of  a  corporation  which  has  been  in  existence  for  sev- 
eral years,  if  you  were  engaged  to  audit  the  accounts  for  the  last  year 
Jrty,  would  you  consider  it  necessary  to  inspect  the  minute  book,  stock 
Wger,  bond  register  or  any  of  the  entries  in  the  books  of  account  at  dates 
pnor  to  that  covered  by  your  audit?    Give  reasons. 


Elxamination  in  Theory  of  Accounts. 
November  1 7.  1910—9  A.  M.  to  12.30  P.  M. 

Answer  twelve  (12)  questions,  but  no  more.  Do  not  repeat  questions, 
but  write  answers  only,  designating  the  questions  by  number. 

1.  State  the  essential  principles  of  the  following  forms  of  bookkeeping 
and  describe  the  method  of  determining  the  profit  or  loss  of  a  business 
mder  each  system: 

(o)  Single  entry;  (&)  Double  entry. 

2.  Define  the  following : 

(ffl)  Gross  profit;  (ft)  Net  profit;  {e)  Trading  account;  (rf)  Profit 
and  Loss  account;  (if)  Active  assets;  (/)  Fixed  assets;  {g)  Current  lia- 
bilities; {h)  Funded  debt;  (i)  Cash  discount;  (/)  Trade  discount. 

3.  Define  the  following  and  state  what  essential  difference  there  is 
between  them: 

(o)  Trial  balance;  {b)  Balance  sheet. 

4.  Define  the  following  and  state  how  eacn  should  be  treated  in  the 
oooks  of  a  corporation : 

(o)  Reserve;  {b)  Sinking  fund. 

S  Define  the  following  and  state  how  you  would  treat  them  in  a  bat 
ance  sheet: 

(n)  Prepaid  expenses;  (6)  Contingent  liabilities. 

6.  Define  the  following  and  state  some  of  their  respective  advantages 
aiid  disadvantages: 

{a}  Voucher  system;  (&)  Loose  Leaf  system. 

7.  Describe  the  process  of  changing  a  set  of  books  from  single  entry 
to  double  entry.  ' 

8.  State  the  purpose  and  describe  the  process  of  analyzing  a  ledger. 

9.  What  are  controlling  accounts?     For  what  purpose  are  they  era- 
ployed  and  how  arc  they  conducted? 

352 


C.  P,  A.  Examination  Papers, 

10.  Name  two  methods  of  distributing  the  overhead  or  indirect  ex- 
penses of  a  factory  so  as  to  equitably  apportion  the  same  to  the  cost  of 
the  different  articles  manufactured,  and  state  briefly  the  advantages  and 
disadvantages  of  each  method. 

11.  How  do  the  accounts  of  a  corporation  and  those  of  a  copartner- 
ship differ  in  treatment  of  the  following: 

(o)  Capital  invested;  (&)  Distribution  of  profits. 

12.  Describe  two  different  methods  in  ordinary  use  for  writing  off  the 
premium  on  bonds  purchased,  stating  briefly  their  respective  advantages 
and  disadvantages.  What  is  the  most  scientific  way  of  treating  said 
premiums  ? 

13.  If  called  in  to  make  an  examination  of  the  accounts  of  a  mer- 
cantile concern  which  had  suffered  fire  loss  six  months  after  the 
taking  of  the  latest  inventory,  how  would  you  determine  the  value  of  the 
merchandise  on  hand  at  time  of  fire?  What  verification  of  the  accounts* 
if  any,  would  you  make? 

14.  Should  a  manufacturing  concern  invoice  its  goods  sent  to  branch 
houses  (i)  at  selling  price,  or  (2)  at  the  prevailing  wholesale  price  of 
the  same  or  similar  goods  obtainable  in  the  open  market,  or  (3)  at  cost? 
State  advantages  and  disadvantages  of  each  method. 

15.  Define  cost  accounting,  and  state  wherein  manufacturing  or  factory 
costs  differ  from  commercial  or  selling  costs. 


Examination  in  Commercial  Law. 

November  19.  1910—9  A.  M.  to  12.30  P.  M. 

Answer  ten  questions,  but  no  more.  Do  not  repeat  questions,  but  write 
answers  only,  designating  the  questions  by  number. 

1.  State  briefly  the  method  to  be  followed  in  Virginia  in  each  of  the 
following : 

(a)  Forming  an  ordinary  business  corporation;  (&)  Dissolving  an 
ordinary  business  corporation;  (c)  Issuing  bonds  of  an  ordinary  busi- 
ness corporation. 

2.  Describe  the  following  stocks  and  securities  issued  by  corporations; 
state  their  leading  characteristics,  the  assets  securing  them,  respectively, 
and  their  order  of  preference  in  case  of  liquidation: 

(a)  Preferred  stock;  (6)  Common  stock;  (c)  First  mortgage  bonds; 
(df)  Promissory  notes  securing  loans. 

3.  Define  the  following: 

(o)  Liability  of  persons  associating  themselves  together  and  engag- 
ing in  business  as  a  corporation,  when  the  incorporation  is  defective  or 

353 


ii  I 


ift 


m 


Accouniancy  Problems  md  Solutions. 

Incomplete;  (b)  Liability  of  stockholders  after  perfecting  the  incorpora- 
tion; (<•)  Public  service  corporations. 

4.  Distinguish  between  State  (Virginia)  banks  and  National  banks  in 
the  following  particulars : 

(o)   Method  of  forming;   (b)   Minimum  capital  stock  prescribed  by 

law;  (e)  Liability  of  stockholders  in  case  of  insolvency. 

5.  Collateral  has  been  deposited  with  the  payee  of  a  promissory  note, 
but  with  no  special  contract  as  to  converting  same  or  subjecting  it  to  the 
payment  of  the  note,  which  is  not  paid.  How  should  the  payee  proceed 
to  convert  or  subject  the  coUateral  toward  the  satisfaction  of  the  debt 
evidenced  by  the  note? 

4  Give  the  order  of  payment  in  the  distribution  of  the  estate  of  a 

decedent 

7.  When  an  endorsed  promissory  note  is  not  paid  at  maturity:  (a) 
What  course  should  the  holder  pursue  in  order  to  prove  that  payment 
has  been  demanded  of  the  maker  of  the  note?  (6)  Against  whom  has 
the  holder  a  right  of  recovery?  (c)  Against  whom  has  an  endorser  who 
has  been  compelled  to  pay  a  dishonored  note  a  right  of  recovery?  (d) 
Under  what  circumstances  is  an  endorser  relieved  from  liability  as  such? 
(r)  How  may  the  liability  of  the  endorser  be  preserved  without  protest 
for  non-payment? 

8.  How  should  the  assets  of  a  co-partnership,  and  the  assets  of  the 
respective  individual  members  thereof,  be  applied  when  the  several  mem- 
bers owe  individual  debts  in  addition  to  the  debts  owing  by  the  co-part- 
nership? 

9.  Define  general  agent  and  special  agent,  respectively,  and  state  the 
general  rules  as  to  liability  of  the  principal  for  acts  of  each  kind  of  agent. 

10.  State  three  ways  by  which  an  agency  may  be  created  and  three 
ways  by  which  it  may  be  terminated. 

11.  Name  three  kinds  of  partnership  recognized  under  the  laws  of  Vir- 
ginia; and  state,  briefly,  their  distinguishing  characteristics. 

12.  Distinguish  between  partners  in  general  business  and  partners  in 
common  of  a  tract  of  land. 

13.  What  is  a  contract?  Name  the  essential  elements  of  a  valid  contract. 
and  state  who  are  legally  qualified  to  make  contracts. 


14.  Mention 
loan  association. 


the  distinctive  characteristics  of  a  building  and 


15.  When  does  the  statute  of  limitations  apply  in  Virginia  on:  (o) 
Promissory  notes;  (&)  Bonds;  (r)  Written  contracts;  (rf)  Contracti 
under  seal;  (i)  Open  accounts;  (/)  Judgments;  (g)  Mutual  accounU 
between  merchant  and  merchant? 


C.  P.  A.  Examination  Papers. 

Examination  in  Practical  Accounting. 
Friday.  November  18.  1910—9  A.  M.  to  12.30  P.  M. 

Questions  2  and  5  must  be  answered. 

Questions  i,  3  and  4  optional  with  the  applicant,  who  must  answer  two 
of  them,  but  no  more. 

Question  No.  1. 

Smith  Hill  and  Davis  engage  in  business  under  an  agreement  that 
Smith  is  to  have  a  salary  of  200.00;  Hill,  $150.00;  and  Davis,  $100.00  per 
month,  respectively;  that  the  earnings  are  to  be  determined  at  any  time 
at  the  request  of  any  partner  and  the  profits  divided  on  a  basis  of  the 
amount  of  business  secured  by  each.  They  are  in  business  nine  months 
and  find  their  accounts  as  follows : 

Smith's  business   $4,500.00 

Hill's  business  2,800.00 

Davis'  business   • 3,000.00 

Net  profits   2,100.00 

They  then  decide  to  rescind  the  salary  agreement  and  divide  the  prof- 
its shown  on  a  basis  of  amount  of  business  secured  individually,  treating 
the  salary  drawn  as  an  advance. 

You  find  errors  during  the  nine  months  period,  namely : 

Office  furniture,  charged  to  operation  $65 .00 

Accounts  Receivable,  Smith's  business,  uncollectible   ...  210.00 

Funds  advanced  by  Davis,  credited  to  his  earning  account  400.00 

Items  not  yet  paid  nor  entered  into  accounts: 

Smith's   salary    $200.00 

Hill's  salary   150.00 

Advertising 27.50 

Clerkhire 130.00 

Telephone 6.00 

Rent  50.00 

Stationery  expense   I5 -OO 

Show  the  journal  entries  necessary  to  readjust  the  accounts;  make  a 
statement  of  the  Profit  and  Loss  account  and  each  partner's  personal  ac- 
count, showing  all  corrections. 

Question  No.  2. 

The  A.  B.  Corporation  has  a  dispute  with  its  agents  C  and  D,  regard- 
ing the  amount  due  from  the  agency  account,  and  asks  you  to  state  the 
account,  which  all  agree  to  accept  as  a  basis  of  settlement.  On  the  books 
of  C  and  D  you  find  three  accounts  with  the  A.  B.  Corporation  as  follows : 

355 


UbipHimiimi 


Accountancy  Problems  and  SoluHo 


II 

iii« 


M«y   i4f  1908. 

June    Ifti908. 

Mj   IS  1908. 


April    6.  1909 

April  17,  1909 

April  19.  1909 

April  24,  1909 

April  29,  1909 

May    17,  1909 

May    20,  1909 

June     8^1909 

June    12,  1909 

June    19.1909 

June    24,  1909 ,., 

Aug.     I,  1909 

Aug.  s  1909 

Sept  IS.  1909 

Sept  18,  1909 

Sept  29,  1909 

Nov.  I,  1909 

Nov.  3.  1909 

Dec.  17.  1909 . 


ns. 


Old  Account 

I2.500.00     April    I,  1908 $59,141.49 

13,582.00      May     5,1908 19434.0S 

28,781.37      June      5,  1909 7  50 

Dec    31.  1909 5»756.o6 

New  Account 

$4.976. 50      May     3,  1909 $10,000.00 

3,219.86      May    18,  1909 17.000.00 

7,111.65      May    18,  1909... 184.66 

6.293.21  June    10,  1909 10,000.00 

4.915.91      June    20^1909 6,500.00 

3.219.73  June    20.  1909 318.44 

4,071.11      July     10,  1909 700.00 

1,895-19      July    10,  1909 43,7, 

3434.26      Aug.    10,1909 7,500.00 

2.699.28      Sept   20,  1909 10,000.00 

4.115.22  Oct.     II,  1909 606.90 

2,573.82      Nov.     5,  1909 5,000.00 

3.089.74  Dec.    10,  1909 3,500.00 

1,576.74 

2429.05 

5472.82 
2^2^.20 
2,222.18 
21927.54 


i 


J30 


IMElliiiiiaiiaimiiiii 


C,  P.  A.  Examination  Papers, 


Jan.      3,  1910 $1,782.90  Jan. 

Jan.      7.  1910 2.089."  Jan. 

Jan.     13,  1910 1.016.01  Jan. 

Jan.     26,1910 4.540.13  Feb. 

Jan.     28,1910 2,708.68  Feb. 

Feb.     15,1910 4.817.71  Feb. 

Feb.    18,  1910 795.31  Feb. 

Feb.     20,  1910 3.212.SO  Mar. 

Mar.    18,1910 1,834."  Mar. 

Mar.    26,1910 1,752.52  April 

April     1,1910 1.919.19  April 

April    9,  1910 1,786.54  May 

April  15,  1910 2,447.83  May 

April  24.  1910 3,584.32  June 

April  24,  1910 138.32  June 

May    15,  1910 3,497.86  June 

May    20,  1910 3,690.43  July 

June      3,  1910 1,477.66  July 

June     9,  1910 1,548.29      Aug. 

June    15,  1910 2,180.75      Aug. 

June    30,1910 3.844.22      Aug. 

July     16,  1910 4,571.59      Sept. 

July    23.  1910 2,085.79      Oct 

July    28,1910 1,787.22      Oct 

July    29,1910 3,970.87      Oct 

Aug.      I,  1910 2,226.69      Nov. 

Aug     7,  1910 1,001 .04      Nov. 

Aug.    14,  1910 3,"2.05      Nov. 

Aug.    15.  1910 2,026.69      Nov. 

Aug.   22,  1910 1,138.74 

Sept     5,  1910 1,173.08 

Sept     7,  1910 2,003.77 

Sept    17,  1910 1,933.39 

Sept   21,  1910 1,552.70 

Sept   23,  1910 1,273.12 

Oct      9,  1910 1,284.72 

Oct     15.  1910 2,965.19 

Oct     25,  1910 2,829.99 

Nov.     I,  1910 3,149.81 

Nov.     7,  1910 3,288.62 

Nov.   16,  1910 2,091.50 

Nov.    19,  1910 1,082.16 

Nov.   22,  1910 1,279.80 


IS,  1910 $10,000.00 

25,  1910 2,500.00 

31,  1910 80.44 

I,  1910 5,000.00 

3,  1910 123.22 

15,  1910 4,000.00 

15,  1910 97.88 

31,  1910 4,000.00 

31,  1910 20.55 

10,  1910 5,000.00 

30,  1910 5,000.00 

20,  1910 7,500.00 

20,  1910 36.45 

10,  1910 5,000. 00 

30,  1910 4,000.00 

30,  1910 164.06 

I,  1910 7,500.00 

24,  1910 5,000.00 

I,  1910 5,000.00 

20,  1910 4,500.00 

31,  1910 102.92 

20,  1910 8,000.00 

10,  1910 2,000.00 

10,  1910 5,000.00 

10,  1910 239.81 

3,  1910 6,000.00 

3,  1910 172.72 

17,  1910 5,000.00 

30,  1910 27.45 


f 


I  I 

i 


357 


Ill 


^=11 


Accotmiancy  Problems  and  Solutions, 


i 


AprM 

April 

May 

Jtine 

July 

July 

July 

Aug. 

Aug. 

Sept. 

Oct 

Oct. 

Oct 

Nov. 

Dec. 

'law 

Jm. 

J  all. 

Prcpai 


lyoy ^ 

^yo^ » • . . , 

1909 

■lyuy • . . , , 

1909 

1909 

^909 ■  • . . . 

■*yuy»  ••••»«,., 

1909*  • 

'909  •■••.••.,,. 

»v09' ■ . . . 

'909 •  • .  • , 

1909. ....,.,,. 

1909. 

I910. 

I910 , . 


INTEWST  Account 
1185.65      Jan. 


82.90 

i»733. 68 

642.25 

527.28 

M55-I3 
1.019.71 

89.56 

199.61 

1^.29 

193.21 

317-77 
103.82 
1,264. 17 
686.68 
228.92 


Jan. 

Feb. 

Feb. 

Mar. 

April 

April 

May 

May 

June 

July 
July 

July 
Aug. 

Sept 

Oct 

Nov. 


1910. . 
1910. . 

1910. . 

1910. . 

1910. . . 

1910. . . 

1910. . . 

1910. . . 

1910. . , 

1910. . . 

1910, . . 

1910... 
1910... 
1910. . . , 
1910.... 

1910 

1910.... 


$376.32 
324.58 
100.00 
286.35 

1.213.94 
203.23 
224.00 

r.ooo.oo 
436.25 

339.31 
467.22 
224.67 

245.93 

213.33 

1.183.59 
221.63 

37731 


Wance,)  f„  any  yeaf  or  ^^s  oi  a  v2  TT  ^~""'"'^''  °"  '""""'ly 
Not.  30k  191a  ^^  °^  '  '""^  ^°'  *<:  Penod  April  i,  .908.  to 


Quesdon  No.  3. 


The  Boulevard  Land  Corporation  is  onK.n!,.M  • 
the  purpose  of  acquiring  100  acres  of  Lh^    •       '"  ^°"'"  '""'"^  "t^  f<"- 
able  lots  for  residential  pj^e,^         ^''-  *^'""«  «""^  '"<»  <>»  '"to  suit- 

a»^«stTp^f;Lrb'lt^^^^^  -^-^  !^  -^-  'n  equal 

l3S.O0D.oo;  a  first  mortage  bdnT™  h  T*"  P^P^rty  '^  Purchased  for 
»«MW..oopaid  in  cash,  rtf  rem2inT*c^  ^or  $.5,000.00  and  the  balance 
stock  being  used  to  aZr^7Zl!^'°°°°°'^""''!'^  '"""  ^""^  °f  "pital 
on  the  market  "'^  ^'^^  "P^"="  °^  Pitting  the  property 

TIier#»  ic  I 

onot.  on  th:  bXrf  c";:  Z^  Zr^^^  ^:^  *«  an  owners 
iZ^f^:  '"°''«^«--  =^'  -"-  >ots  being  reulraHaff  ^//jl^'r 
the^^uIel?r'?°o;7h,?"'''''  '°  ''''"'  '"  '"''  S°  ^^et  in  width,  facing 

A  and  B  are  engag^  fe  Th '  rea,  !«  ,    K   '■'"  ''"'""'  ^'^°"«  '°  •"■»• 

holders  in  this  corpomfon  In  k        .      ,   u*"*""'"  ^nd  are  also  stock- 
11*13  *.wrporation,  and  by  vote  of  the  fitnrithr^u^^^ 

At  general  sales  agents  for  the  Boulevard  'i^^™"'''*'^^  "e  appointed 
In  making  an  audit  of  the  acrn.  mf      ^"<'/°^°"t'°n- 

P-id  fesoaoS  in  releases  -  $7  o^T  tl  Ti"       ",  •""'  ""  '^""'P'"^  •>" 
«—  leases,  *7,ooaoo  to  release  lots  purchased  by  out- 

35** 


M. 


C.  p.  A,  Examination  Papers. 

siders  and  $2,500.00  to  pay  for  the  release  of  free  lots  drawn  by  A  and 
B  as  stockholders.  Would  you  have  any  comment  to  make  regarding  this 
or  any  adjustments  to  make  in  the  accounts?    Explain  in  detail. 

Question  No.  4. 

On  account  of  the  inability  to  make  collections  or  to  borrow  funds, 
Johnson,  Jones  and  Jacobs  are  forced  into  bankruptcy.  Their  statement 
to  the  receiver  is  as  follows : 

Assets 

Property,  consisting  of  factory  and  land  $37.5oo.oo 

Machinery   12,800.00 

Office  furniture  and  fixtures  1,250.00 

Cash  on  hand  and  in  bank 900.00 

Stock  on  hand,  raw  goods 5,000.00 

Stock  on  hand,  finished  for  sale 10,000.00 

Accounts  receivable  20,000.00    $87450.00 

Liabilities 

Mortgage  on  property  and  plant $40,000.00 

Bills  payable  25,000.00 

Accounts  payable 15,000.00 

Surplus   7450.00    $87450.00 

What  accounts  would  you  transfer  to  the  receiver? 

Open  a  proper  set  of  books  for  the  receiver  covering  this  business. 


r 


Question  No.  5. 

B  dies  March  23,  1905,  leaving  an  estate  consisting  of  the  following 
property  in  charge  of  his  executors,  X,  Y  and  Z : 

Cash  in  bank  $10,000.00 

Accounts  receivable  from: 

I $2,000.00 

2 3,000.00 

3 1,000.00 

4 3,000.00 

5 1,000.00 

6 4,000.00 

7 2,000.00 

8 3,000.00 

9 4,000.00 

10 1,000.00 

$24,000.00 


359 


Accountancy  Problems  and  Solutions, 

Stocks  and  bonds: 

1.  100  shares  Union  Bank    (par  value, 

$100.00)    $12,000.00 

2.  40  shares  Traders  Bank   (par  value, 

$100.00)    12,000.00 

3.  $1,000.00  C.  &  O.  4's— J.  &  J 1,050.00 

4.  $5,000.00  P.  R.  R.  6's— M.  &  S 4,500  00 

5.  $10,000.00  N.  Y.  C.  3i's-J.  &  J 10,450.00 

$40,000.00 
and  three  parcels  of  unimproved  real  estate. 

Three  of  his  heirs  are  also  indebted  to  him  for  money  loaned; 

^ $5,000.00 

^ 6,000.00 

E«  •  • • 7,000.00 

$18,000.00 


C.  p.  A,  Examination  Papers. 


The  will  directs  the  executors  to  dispose  of  the  real  estate,  convert 
the  other  assets  and  distribute  the  funds,  to  wit: 


Widow one-half 

''C 

Children -^D 


.one-sixth  each 


Up  to  April  30,  1906,  the  executors  collect  all  the  accounts  receivable 
with  the  exception  of  items  No.  3.  No.  6  and  No.  10,  on  which  they 
realized  only  $4,500.00,  the  balance  being  uncollectible. 

Bonds  No.  3  and  No.  5  matured  January  i,  1906,  and  bond  No.  4 
matured  March  i,  1906,  and  were  redeemed  at  par.  Stock  No.  2  is  sold 
at  $325.00  and  stock  No.  i  at  $125.00,  both  sales  taking  place  on  April 
IS,  1905. 

The  real  estate  is  sold  for  cash,  $5,000.00;  and  mortgages  $10,000.00. 

Interest  has  been  received  on  bank  balances,  $300.00;  accounts  receiv- 
able, $50.00;  and  on  each  of  the  bonds  at  the  regular  interest  periods  in 
full : 

The  executors  pay  decedent's  debts  and  funeral  expenses,  $1,000.00. 
Counsel  fees,  $500.00;  safe  deposit  box  rent,  $10.00;  and  office  expenses 
incident  to  collection  of  income,  $500.00.  The  executors  waive  their 
claim  to  commissions,  but  ask  for  an  allowance  to  cover  expenses  in- 
curred by  them  of  $75.00  each. 

State  the  executors'  first  and  final  account  and  prepare  a  statement 
for  the  purpose  of  guiding  the  court  in  directing  a  distribution  to  be 

JDO 


Intermediate  and  Final  Examinations  of  the  Institute 

of  Chartered  Accountants,  Held  During 

November  and  December,   1910. 


Bookkeeping  and  Accounts. 
(Including  Partnership  Accounts.) 


I.  From  the  following  combined  trading  and  profit  and  loss  accounts 
of  a  private  firm  for  the  year  ending  31st  December,  1908,  and  from  the 
profits  of  the  two  previous  years,  show  the  amount  upon  which  income 
tax  (due  January,  1910)  should  be  paid : 

Dr. 

To  Stock  ^1.200 

"    Purchases ^'5«> 

"    Wages 5400 

"    Carriage    550 

"    Gas  and  Water,  and  Municipal  Rates 260 

"    Salaries   (Partners)    800 

"    Bad  Debts  written  off 14© 

"    Repairs  to  Buildings,  cost 300 

"    Repairs  and  Renewals  of  Plant,  cost 200 

"    Income   Tax loi 

"    Interest  on  Capital 250 

"    Interest  on  Loan  from  Bankers 80 

"    Rent  of  Works  charged  at  6  per  cent,  on  cost 300 

"    Profit  1,110 

£19,191 

MM—— 

By  Sales  £17,511 

"    Stock   1,600 

"    Rent  from  Property  included    in  Works  Assessment  under 

Schedule  A,  at  £300  gross 80 

£19*191 

The  amounts  of  the  annual  profits,  upon  which  the  previous  assessment 
was  made,  were:  for  1905,  £2,450;  for  1906,  £2,950;  for  1907,  £2,700. 

2.  You  are  to  be  appointed  auditor  under  a  partnership  deed.    The  draft 
articles  of  partnership  are  sent  to  you  for  your  opinion  and  approval  of 

361 


\^ 


11 


II 


AceoMHiancy  Problems  and  Solutions. 

cJaiises  affecting  the  accotmts.  What  matters  of  account  would  you  ex- 
pect to  be  mentioned  in  the  draft  articles,  and  state  shortly  the  objects  of 
the  clauses. 

3.  A  trading  company  takes  out  a  capital  redemption  policy  with  an  in- 
surance company  to  provide  for  a  wasting  asset,  paying  £80  per  annum 
premium.    The  premium  is  to  be  provided  out  of  revenue. 

Give  examples  showing  the  entries  to  be  made  in  the  books  of  the  trad- 
ing company  (i)  annually,  and  (2)  upon  payment  of  the  capital  sum  by 
the  insurance  company. 

4.  A.  and  B.  carried  on  business  in  partnership  and  divided  profits  and 
losses  in  proportion  to  their  capital,  three-fifths  and  two-fifths  On  ist 
January,  1910,  A.'s  capital  was  £10,500  and  B.'s  £7,000.  as  shown  by  a  bal- 
ance sheet  of  that  date.  They  agreed  to  admit  C.  as  a  partner  from  the 
same  date  on  the  following  terms :  .  ,  •     *t, 

(1)  The  assets,  liabilities,  and  capital  to  be  taken  as  shown  m  the 

balance  sheet. 

(2)  £2,500  to  be  added  to  the  assets  for  goodwill. 

(3)  The  amount  of  goodwill  to  be  added  to  A.'s  and  B.'s  capital  m 
the  proportions  in  which  they  divide  profits. 

(4)  C  to  pay  to  the  partnership  such  a  sum  as  will  give  him  one-fifth 
share  in  the  business.  . 
State  what  amount  of  capital  C.  has  to  bring  in ;  set  out  the  capital  ac- 
count of  each  partner  in  the  new  partnership,  and  state  in  what  propor- 
tions the  profits  will  be  divided  in  future.  A.  and  B.,  as  between  them- 
selves, sharing  in  the  same  proportions  as  before. 

S  Herbert  Smith  and  Ernest  Jones  are  in  partnership,  sharing  profits 
equally  and  having  each  a  capital  of  £5.000.  It  is  provided  in  the  articles 
of  partnership  that  a  partner  may  retire  upon  giving  certain  notice  to  the 
other  and  that  in  the  event  of  a  partner  retiring  he  shall  be  repaid  his 
capital,  proportionate  share  of  profits  to  the  date  of  dissolution,  less  his 
drawings— these  profits  to  be  taken  on  the  basis  of  the  average  profits  of 
the  last  three  completed  years,  as  stated  in  the  balance  sheet  book  signed 
by  both  partners— and  in  addition  he  shall  be  paid  his  share  of  the  good- 
will, viz.,  half  the  goodwill  of  the  business.  The  goodwill  to  be  consid- 
ered equal  to  three  times  the  average  profits  of  the  last  three  completed 

"jMpUBi''l9|  ■"'flu 

The  amount  payable  to  Herbert  Smith  for  capital,  profits,  less  drawings 
md  goodwill,  is  to  be  satisfied  by  giving  six  bills  of  equal  amounts  carry- 
ing interest  at  the  rate  of  5  per  cent,  per  annum  from  ist  October,  1910. 

The  yearly  accounts  are  made  up  to  the  31st  December,  and  Herbert 
Smith  retires  on  30th  September.  1910. 

The  signed  balance  sheets  show  the  following  profits: 


Yeir  to  31st  December,  1907- •• 

1900.  • . 

1909*  *  * 


II 


II 


u 


II 


£10,000 
3.000 
2,300 


C.  p.  A.  Examination  Papers, 

Show  what  amount  is  due  to  Herbert  Smith  for  capital,  goodwill  and 
profits,  he  having  already  drawn  £500  on  account  of  profits,  and  the 
amount  of  each  bill  with  the  interest  thereon  added  to  it 

7.  Directors  of  a  Limited  Liability  Company  (having  an  authorized  cap- 
ital of  £120,000)  issue  a  prospectus  inviting  applications  for  100,000  shares 
of  £1  each,  and  stating  that  10,000  shares  will  be  issued  in  addition  as 
fully  paid  to  the  vendor  in  part  payment  of  purchase  money. 

2/6  per  share  is  payable  on  application. 

2/6         "  "         on  allotment. 

5/_         «  "        3  months  after  allotment. 

10/-  "  "        6       « 

The   capital   offered   was    over-subscribed   by    10,000    (ten   thousand) 

shares. 

The  amount  due  on  allotment  was  received  in  full.    The  sum  of  £24.000 
was  received  in  respect  to  the  first  and  £48,000  in  respect  to  the  second 

call. 
The  purchase  money  is  stated  to  be  £80,000,  viz. : 

Land  and  Buildings £35P00 

Stocks  and  Works  in  Progress 15.000 

Machinery  and  Plant 20,000 

Goodwill io»«» 


£80,000 

Make  the  journal  entries  necessary  to  open  the  books  of  the  company 
and  to  record  the  payment  of  the  instalments,  stating  where  the  details  of 
calls  in  arrear  should  be  found. 

8.  You  are  asked  to  complete  a  balance  sheet  from  books  you  were 
unable  to  balance. 

What  would  you  do  with  the  difference  in  figures? 
What  are  the  dangers  attending  differences  in  figures? 

9.  The  following  was  the  balance  sheet  of  a  firm  upon  dissolution  of 
partnership,  A.  retiring,  B.  continuing  the  business.  The  partners*  shares 
as  to  capital  and  profits  were;  A.,  three- fourths ;  B.,  one-fourth. 


Capital,  A £9,000 

Capital,  B 3,000 

Loan  from  A 2,000 

Creditors    1,800 

Reserve   1,200 


£17,000 


362 


Freehold    £12,000 

Debtors 3.000 

Cash   1,000 

Stock 1,000 


£17,000 


363 


w 


"1" 

ll 
'  ih 


t    I 


m 


Accountuncy  Problems  and  Solutions, 

A.  agreed  to  biiy  the  freehold  for  £io,cxx}. 

The  stock  was  taken  over  by  B.  at  lo  per  cent,  discount. 

The  debtors  realked  86  per  cent  of  their  value. 

The  costs  of  the  liquidation  exclusive  of  the  above  deficiencies  were 

What  did  each  partner  receive? 

Show  cash  account,  liquidation  account,  and  the  partners'  accounts. 

lo.  When  preparing  the  annual  accounts  of  a  London  firm  having 
branches  in  New  York  and  Brussels,  state  generally  how  you  would  deal 
in  the  London  books  with  the  balances  appearing  in  the  branch  ledgers, 
and  also  how  the  question  of  the  rate  of  exchange  would  affect  the  year's 
results. 


Bookkeepbg  and  Accounts. 

(Including  Elxecutorship  Accounts.) 

1.  Prepare  journal  entries  to  record  the  following  transactions  in  the 
books  of  a  limited  company:  200  shares  of  ii  each,  15s.  called  up,  and  on 
which  5s.  per  share  had  been  paid,  were  forfeited  and  subsequently  sold 
to  X.  for  iijo,  credited  with  15s.  per  share  paid  up. 

2.  Prepare  a  balance  sheet  at  30th  June,  1910,  and  profit  and  loss  ac- 
count for  the  year  ended  that  date,  of  the  Shop  Company,  Limited,  from 
the  following  particulars,  viz. : 

The  authorized  share  capital  is  80,000  5  per  cent,  preference  shares  of 
£1  each,  and  40,000  ordinary  shares  of  £1  each,  of  which  60,000  preference 
and  the  whole  of  the  ordinary  shares  have  been  issued  and  fully  paid  up. 

Bills  Receivable £270 

Bills  Payable 150 

premises  Depreciation  Account 4000 

Cash  at  Bank  and  in  Office 210 

House  and  Office  Furniture 400 

Transfer  Fees 20 

Doubtful  Debts  Reserve. 300 

Bank  Charges  and  Interest 250 

Stock  at  30th  June,  1910. 28,500 

Law   Costs , 200 

Trade   Debtors. 13,000 

Office  Expenses,  Rent,  Salaries,  Audit  Fee,  etc 2,970 

Change  Cash  M  Shops. , , 250 

'%!  """'If' 


C.  p.  A.  Examination  Papers. 

Reserve   * ^'^ 

Rents,  Insurance,  etc.,  paid  in  advance 650 

Trade  Creditors ^2,500 

Profit  and  Loss  Account,  Credit  Balance  at  ist  July,  1909 SS© 

Freehold  and  Leasehold  Premises 85,000 

—  280 


Sundry  Creditors — 

Horses,  Carts,  Vans,  etc 2,000 

Trading  Account   (Profit) 12,000 

Bills  Receivable  under  discount 270 

Provide  10  per  cent,  depreciation  on  house  and  office  furniture  and  on 
horses,  carts,  vans,  etc.  Make  a  further  reserve  of  £300  for  doubtful  debts 
and  increase  premises  depreciation  account  and  reserve  account  by  £1,000 

each. 

What  will  be  the  balance  of  profit  to  carry  forward  after  providing  for 
the  payment  of  the  preference  dividend  and  a  dividend  of  5^  per  cent,  on 
the  ordinary  shares? 

3.  Journalize  the  following  transactions  of  a  limited  company : 
The  company  was  registered  on  the  ist  January,  1908,  with  a  nominal 
capital  of  £120,000,  divided  into  120,000  shares  of  £1  each,  of  which  40,000 
were  issued  as  fully  paid  to  the  vendor  as  part  purchase  consideration, 
40,000  offered  for  subscription  to  provide  working  capital,  payable  as  to 
5s.  per  share  on  application,  5s.  per  share  on  allotment,  and  the  remainder 
in  two  calls  of  5s.  each;  40,000  shares  to  be  held  in  reserve  for  future 
issue.  The  vendor  also  received  £10,000  in  5  per  cent,  debentures,  being 
the  balance  of  the  purchase  consideration. 

1908. 
January       5 — Applications  were  received  for  35,000  shares. 
"  6— Allotment  made  of  35,000  shares. 

"         10— Amount  due  on  allotment  of  35,000  shares  was  received. 
February  10— First  call  of  5s.  per  share  was  made  payable  on  the  24th 

February. 
"         10—40,000  fully  paid  shares  allotted  to  vendor. 
"         10 — 5  per  cent,  debentures  issued  to  vendor  for  £io/xx),  balance 
of  purchase  money. 

4.  State  briefly  the  principles  governing  cost  accounts,  and  give  a  form 
of  cost  sheet  suitable  for  a  manufacturing  business,  entering  not  less  than 
«ix  items  of  cost  relating  thereto. 

5.  John  Jones  died  on  the  30th  April,  1910,  leaving  the  following  estate: 

Cash  in  House Jb^ 

Cash  on  Deposit  at  Bank 5,000 

Cash  on  Current  Account  at  Bankers 550 

Household  Furniture,  valued  at 

365 


■■■■■■■I 


i 


III 


Accountancy  Problems  and  Solutions. 

Mortgage  at  4  per  cent,  of  leasehold  premises  to  secure  £4,000. 

Six  months'  interest  fell  due  on  the  30th  June,  1910. 

18,000  Consols,  2j^  per  cent 640D 

14,000  Japanese  4  per  cent.  Loan 3»70O 

Half-years'  interest  payable  on  the  30th  June,  1910. 

Debts  Due  to  Testator h90O 

Life  Policies  and  Bonuses 6,000 

Sundry  Creditors i<» 

You  are  required  to  write  up  the  books  and  to  make  out  a  balance  sheet 
at  the  31st  October,  1910,  ignoring  income  tax  and  interest  on  bank 
deposit. 

The  widow  was  to  have  the  use  of  the  furniture  for  life  and  an  imme- 
diate legacy  of  ii,ooo,  which  was  promptly  paid. 

Funeral  expenses  and  testamentary  expenses  amounting  to  £7$  »«<* 
ii,SOO,  respectively,  had  been  paid,  and  the  liabilities  discharged  before 
the  31st  October. 

The  life  assurance  moneys  had  been  received,  as  also  all  interest  due  on 
investments,  and  the  debts  had  been  collected,  with  the  exception  of  £151^ 
which  had  proved  bad. 

6.  Explain  the  difference  between  a  trading  account  and  a  profit  and 
loss  account,  and  state  in  which  account  you  would  place  the  following 
items,  giving  your  reasons : 


Purchases. 

Carriage  and  Freight. 

Debenture  Interest. 

Depreciation. 

Allowances. 

Bad  Debts. 

Wages. 

Commission. 


Advertising. 

Sales. 

Stocks  on  Hand. 

Returns. 

Discounts. 

Fuel. 

Packages. 

Directors'  Fees. 


7.  From  the  following  items,  appearing  in  the  trial  balance  of  the  books 
of  a  company  at  the  close  of  its  financial  year,  prepare  a  profit  and  loss 
account,  giving  effect  to  the  further  remuneration  of  the  directors  as  men- 
tioned below: 


Di..rectof s*  Fees ••....•• ■ 


Dr. 

2,000    O    O 


Cr. 


s.  d. 


.ICcnt    ••••••»• 

Salaries  ..... 

Law  Charges. 
Ore  Sales.... 

Advertising  •. 
Interest   ..... 


500 

350 

SO 


o 
o 
o 


o 
o 
o 


25  o  o 


40,500  o  o 


42010  o 


300 


C.  p.  A.  Examination  Papers. 

Dr.  Cr. 

£       s.  d.       £       s.  d. 

«  ...  19 10  o 

Transfer  Fees --  ^  ^ 

Income   Tax • ^  ^ 

Depreciation   

Audit  Fee ^o 

Sundry  Expenses •  •  •  •       ^3 

The  directors  are  entitled,  under  the  articles  of  association,  to  appro- 
priate and  apply,  by  way  of  further  remuneration  in  any  year  m  which  a 
dividend  is  payable  (assume  the  payment  of  a  dividend),  a  sum  equal  to  5 
per  cent,  upon  the  amount  of  the  profits  for  each  year. 

8TB  died  on  the  31st  May,  1909.  possessed  of  500  5  per  cent,  cumula- 
tive preference  shares  of  £5  each  in  Robinson's  Brewery  Company.  Lim.. 
upon  which  dividends  for  two  years  were  in  arrear.  On  the  30th  June. 
1909,  the  company  declared  dividends  sufficient  to  pay  the  preference  share- 
holders for  the  year  ended  30th  April,  1909,  with  arrears.  How  would 
you  deal  with  these  dividends  in  the  executors'  accounts? 

9.  A  limited  company  goes  into  voluntary  liquidation  on  the  31st  De- 
cember, 1909,  having  assets  appearing  in  the  books  as  follows : 

Works  and  Other  Properties £90,000 

Liquid   Assets, ^°'°°^ 

Its  liabilities  are  £20,000,  and  its  capital  (paid  up)  £100,000.  The  assets 
are  sold  to  a  new  company  for  £50,000,  payable  in  shares  of  that  company 
of  £1  each,  credited  with  iss.  per  share  paid  up,  and  £22,000  in  cash,  which 
latter  just  suffices  to  pay  the  liabilities  and  costs  of  liquidation.  Close  the 
books  of  the  company  in  liquidation. 

10.  The  undermentioned  errors  were  discovered  in  the  books  of  J.  John- 
son &  Co.,  affecting  the  year  ended  30th  June,  1910: 
1910. 
(i)  April  20— A  cheque  received  from  W.  Brown  for  £11  was  posted 

to  his  credit  as  ns. 

(2)  May    31— A  sale  of  £26  los.  was  credited  correctly  but  debited 

to  the  customer's  account  as  £20  6s.  lod. 

(3)  June  20— Goods  were  returned  by  R.  Carr  of  the  invoice  value 

of  £27  los.,  and  were  taken  into  stock  at  £25,  but 
returns  were  not  entered  in  the  books  until  the 
following  month. 

(4)  June  29— The  acceptance  of  Badart  Freres  to  Johnson  &  Co.'s 

draft  for  £220,  payable  in  Paris  and  which  had  been 
discounted,  was  dishonored.  The  acceptance  was 
worthless  and  the  bankers  debited  Johnson  &  Co.'s 
account  on  the  ist  July,  1910. 

Show  how  the  adjusting  entries  should  be  made  in  J.  Johnson  &  Co.'s 
books  at  the  30th  June,  1910. 

367 


tl 


¥i 


I        - 


I 


Accmmimcy  Problems  and  Solutions. 

Auditing. 

I.  A  special  form  of  accounts  is  prescribed  by  statute  for: 

(a)  Railway  Companies. 

(b)  Gas  Companies. 

(c)  Building  Societies. 

Give  three  salient  features  out  of  each  form  as  prescribed. 

1.  In  auditing  the  accounts  of  a  trading  undertaking  you  find  that  an 
•ccoiint  is  kept  in  a  private  ledger  for  the  bought  ledger  and  also  for  the 
sold  ledger.  Both  of  these  accounts  are  in  agreement  with  the  total  bal- 
ances as  abstracted  in  detail  from  the  bought  and  sold  ledgers  respectively. 

You  are  not  required  to  check  the  postings  of  the  individual  entries  in 
the  subsidiary  ledgers,  but  apart  from  this  you  are  asked  to  take  such  ac- 
tion as  shall  in  your  opinion  be  a  check  against  possible  fraud.  Set  out 
the  work  which  you  would  recommend  should  be  done. 

3.  The  A.  B.  Company  make  up  their  accounts  to  31st  December,  1908. 
The  demand  note  for  income  tax  for  the  year  ending  5th  April,  1909,  has 
been  received  as  follows: 

£     s.  d. 

Schedule  A.    Property  held  on  lease  at  £600  per  annum... 25  o  o 

Schedule  D.     Assessment,  ii5,640 782  o  o 

Schedule   K     Directors 50  o  o 

The  following  payments  have  been  made,  all  less  income  tax : 
Rent  on  each  quarter-day,  four  quarters  to  Christmas,  1908. 
Directors'  fees,  ii,ooo.    One  year  to  31st  December,  1908. 
Debenture  interest  at  5  per  cent,  per  annum  on  ^50,000,  paid  30th  June 

and  31st  December,  1908. 
Interim  dividend,  4  per  cent.,  to  30th  June,  paid  31st  August,  1908,  on 

iioo,ooo  ordinary  share  capital. 
It  is  proposed  to  pay  a  final  dividend  of  5  per  cent,  less  income  tax, 
on  28th  February,  1909, 
Set  out  in  ledger  form  the  account  with  the  Income  Tax  Commissioners 
Dn  31st  December,  1908,  as  you  would  desire  it  to  be  stated. 

4  The  balance  sheet  of  a  company  of  which  you  are  the  auditor  con- 
tains ** inter  alia'*  the  following  entries  when  presented  to  you: 

Dr.    Debentures  at  4  per  cent... £30,000 

Sundry  Creditors: 

Trade  Accounts £12,000 

Loan  " 5,000 

Bank  Loan 7,500 

24,500 

Cr.    Investment  in  Government  and  other  securities 14,240 

368 


C.  P.  A,  Examination  Papers, 

You  ascertain  the  following  facts :   The  debentures  are  part  of  an  au- 
thorized issue  of  £40|000. 
The  investments  consist  of  the  following  securities: 

Consols,  £3,000  stock  at  80 ^'^ 

India  3^/4  per  cent  £2,000  stock  at  92 y."*'        "^^ 

The  Quick-Burst  Gold  Mining  Company,  Urn.,  10,000  ordinary 
shares  of  £1  each  (quoted  at  is.  6d.  per  share),  cost 


10,000 


£14,240 

The  bank  holds  as  security  the  India  stock  and  £5,000  debentures,  addi- 
tional to  the  £30,000  shown  on  the  balance  sheet. 

An  undertaking  has  been  given  by  the  company  to  the  loan  creditor  to 
issue  £5,000  debentures  to  him  if  called  ^or. 

State  what  additions  or  amendments  in  the  balance  sheet  in  respect  of 
the  items  stated  you  would  desire  and  your  reasons  in  each  case. 

S  The  premises  of  a  trading  company  are  held  on  lease  for  thirty  years. 
They  were  acquired  at  a  premium  and  large  sums  have  been  expended  on 
additions  and  improvements.  In  the  first  ten  years  considerable  sums 
have  been  set  aside  in  the  accounts  for  leasehold  redemption  before  dis- 
closing to  the  shareholders  the  profits  of  each  year,  and  the  total  amount 
so  provided  to  31st  December,  1908,  is  largely  in  excess  of  the  amount 
necessary  to  write  off  the  leasehold  asset  proportionately  during  the  thirty 

The  eleventh  year,  1909,  is  a  bad  year,  the  profits  have  declined,  and  to 
enable  them  to  pay  the  customary  dividend  the  directors  determined  to 
make  no  provision  out  of  the  profits  of  that  year  for  leasehold  depre- 
ciation. 

State  what  you  would  do,  as  auditor,  showing  the  form  your  action 
would  take,  and  give  the  reasons  for  your  procedure. 

6.  In  auditing  the  accounts  of  a  manufacturing  business  you  are  asked 
particularly  to  ascertain  that  all  outstanding  accounts  have  been  brought  in. 
How  would  you  satisfy  yourself  on  this  point  as  regards: 

Wages  ? 

Rates   and   Taxes? 

Bought  Accounts? 

And  state  two  other  heads  which  you  would  investigate. 

7.  Give  the  form  of  report  you  would  make  to  the  members  of  a  Lon- 
don limited  company  whose  business  is  carried  on  abroad,  and  whose  for- 
eign accounts  are  audited  and  certified  locally. 

8.  State  briefly  the  difference  in  principle  between  the  audit  of  the  ac- 
counts of  a  private  partnership  and  a  limited  company. 

369 


Accountancy  Problems  and  Solutions. 

ft  You  are  appointed  auditor  on  the  formation  of  a  limited  con,n,„, 
and  are  instructed  to  examine  the  books  for  the  nnrLt.  IT  .f  "^  7' 
particulars  required  for  the  statuto^  re^L  lde?7h  r  '""'^'i*^ 
190a  What  steps  would  yon  tate  o^Iku  ?  •  *'  ^""P^"'"  Ac^ 
tiBcate  in  respert  of :  '  ^°"  *°  «'^'  ""'  ""''"""y  «^- 

(a)  Shares  allotted  by  the  company. 

(b)  Cash  received  in  respect  of  such  shares. 

Sm.      ^      **'  '"'"''™'  *"  "^  considerable  sum  is  paid  for  the 
Give  an  instance  where  yon  would  consider  it  necessary  that  vearl, 

fu7hr?„st«    1,  """""  °"*  °'  -™'"'  '°  extinguish  ^e^asset  l^l 
lunner  instance  where  vou  would  rnnciH^^  o„-,i, 

in,i  c*^»«  ■'^        woum  consider  such  a  course  unnece<;<;arv 

and  state  your  reasons  ""*ac  uunecessary. 


Find  EiiMiiialioii,  November-December.   I9I0. 

Bodieepbg  and  Accounts. 

(Including  Executordiip  Accounts.) 

I.  J.  Smith's  balance  sheet  showed  the  following  assets  and  liabilities: 

Land   and   Buildings 

Stock   ................  ' '  * •  •  •  •  •  J^'So.ooo 

Work  in  Progress ....*..'.'. 100,000 

43.000 

55,000 
8,000 


Sundry  Debtors. 

Patent  Rights 

Cash  in  Bank '•• 

Sundry   Creditors S.000 

Sundry  Bills  Payable*'*'*."*" '"  * 50.ooo 

0,000 

ch^e"£?urrfoVth'e!„roft::*  "''•  "r^  *"  '"""^^  -  ->- 

nary  shares.  ^.oo.oco^Jp^erent'rril'^^^'.^''^'*"  '"  '"'«- 
tnres,  and  the  balance  in  cash    th!  .Z'         '        "  '*^  ""  ""'•  ''«'«»- 

assets  of  J.  Smith  (with  the  ex^'e^LTri  T?'."^  *°  •"'''  °'"  ">* 
ities  to  creditors.  «<=ept.on  of  the  bank  balance)  and  the  liabil- 

TTie  registered  capital  of  the  company  was  £400000  rfivM.^  •  . 
ordmary  and  ,5o,c»o  preference  shaVes  0^,  e^'^  ^'^"^  """  '^■'^ 

i'ifty  thousand  ordinary  share*  a«^  ♦»,«  k  i  \   , 

were  issued  for  subsc^TionX  th"^^^^^^^  ''''"'"'^  ^^^^" 

plication,  5s.  per  share  on  allotment  and  /oT  '       .'''  "''  '^''''  °"  ^P" 
allotment  allotment  and  los.  per  share  one  month  after 


C.  P.  A.  Examination  Papers. 

The  issued  capital  was  fully  subscribed,  and  the  shares  (including  the 
vendor's  shares)  and  the  debentures  were  allotted  by  the  company  on  ist 

March,  1910.  ,     .  .  ■.  t     *t. 

By  the  30th  June  all  moneys  due  thereon  had  been  received  by  the  com- 
pany except  the  amounts  due  on  allotment  and  call  accounts  in  respect  of 
200  ordinary  shares  and  100  preference  shares,  and  the  directors  had  dis- 
charged the  company's  cash  indebtedness  to  the  vendor,  paid  the  pre- 
liminary expenses  of  £5,000,  and  declared  the  shares  forfeited  upon  which 
allotment  and  calls  were  in  arrear.  .         .• 

Give  the  entries  which  should  appear  to  record  these  transactions  (in 
totals)  in  the  company's  journal,  cash  book  and  ledger. 

'^.  A.  Andrews  &  Co.,  of  London,  consign  goods  to  the  value  of  £2,000 
to  their  agent,  B.  Bengalee,  in  Bombay,  and  draw  on  him  for  £1,500  at 
three  months,  discounting  the  bill  at  the  National  Provincial  Bank  for 

£1,485. 
The  charges  for  insurance,  freight,  etc.,  paid  by  A.  Andrews  &  Ca 

amounted  to  £70. 

In  due  course  B.  Bengalee  rendered  an  account  sales  to  A.  Andrews  & 
Co.  for  £2,500,  less  commission,  etc,  £85,  enclosing  a  sight  draft  for  the 

balance. 
Record  these  transactions  in  A.  Andrews  &  Co.'s  books. 

3.  "  A."  and  "  B."  are  in  partnership  as  brewers,  and  the  amount  of 
their  assessment  under  Schedule  D  for  1910-11  has  been  fixed  by  the  sur- 
veyor at  £1,222  (£1,240,  less  allowance  for  wear  and  tear,  £18). 

The  surveyor  has  disallowed  compensation  fund  charges,  £36. 

"A.,"  on  behalf  of  the  firm,  has  made  a  return  as  under: 


X roiits   01    1  rade .•••..•••••.•••••«•■•. 

Less  Interest  on  Mortgages  (gross) 


"A.'s"   Share    (one-half) £374 

"B.'s"   Share    (one-half) 374 


*'#  T** 


£748 


370 


The  separate  returns  of  the  partners  for  purposes  of  securing  abate- 
ments were  as  follows: 

A.  B. 

Profits   of   Trade £374  ^374 

From  Property  (half  each  of  the  Schedule  A  Assessments  of 

the  licensed  properties) 119      119 

Share  Dividends  (gross)   already  taxed 15  NiL 

£508  £493 
371 


fli 


\ri 


0' 


i- 


II 


AccounUincy  Problems  and  Solutions. 

^'^  ^  "^''  ^\ "^*''"'  »«^'"^  *«  assessment  made 

MOW  the  amoont  of  the  firm's  nltim.t. .      ^   . 

of  fax  payable.  "^  """»  "tuMte  assessment  and  the  total  amount 

(i)  Assuming  the  compensation  fund  rhanr.c  ,,-  -ii_     a 
^Assumi,,  the  compensation'tdthlSer'a^'rarK 


4  On  31st  December,  igoa  the  trial  h-ilan/.i.  ^t  u.    %r  ^      ^     . 
Company,  lim.,  was  m  m^vT  '  ""^  *^'  ^°'°''  ^"^^ 


5*000  Ordinary  Shares  of  £1  each 

100  s  per  cent.  Debentures  of  iio  each 

Goodwill " •* 

Freehold  Property. ^.000 

Machinery  and  Tools ^*^^ 

Fixtures  and  Fittings... ^^ 

Hire   Cars ^ 

Sundry  Debtors.V,  .V.V.  .V.V. ^^ 

''tel'er'^TZ'""'  ''""'  ^^^tVorb^' eVc];  aVst'De:*      "^^ 

Cash  at  ^^::::::::::::::::::- ^^ 

Sundry  Creditors. ^»®S5 

Reserve  for  Bad  Debts/aVsrDecember/i^*'''* 

pZrm'  ^"*^'"^«  '^''''  ^"^  T"^^^  (urd)::::::;-  . 

Fetrol,  Oil.  etc.   (used)....  

Cost  of  Repairing  Cars  (Wage's  and  MatcViiis) ?° 

Charges  to  Customers  for  Repairinir  Cars  

Expenses  of  Hire  Qrs 

Wages  (Yardmen,  etc).. 

Charges  to  Customers  for  Hire  Cars 

Sales  of  Accessories,  including  Tires  and' Tub^s 

Cars  Purchased  for  Resale. ...  

Sales  of  Petrol,  Oil,  etc ^^^^^ 

Sr'sLt'^^^^^^^^ 

Management  Eip€'nses".".',*.*.V.'.V.V.V "  " ' 

CSarage  Rents " 45o 

Repairs,   Plant,  etc  

Bad  Debts  written  off.'.*.'.'.'.';" '» 

Carriage  on  Cars  Sold        ' ^o 


meermg 
iSfOOO 

1.000 


153 
80 


,000 
550 
750 

200 


800 


330 

^1650 

750 
85 

12,000 
43 


Debenture  Interest  to  31st  December,  ,909. ;.'; "  ?? 

Profit  and  I^ss  Account  (Balance,  31st  DecemWr,  190^) 


500 


mo 


^3*693    i23.693 


C,  P,  A.  Examination  Papers. 

The  reserve  for  bad  debts  is  to  be  increased  to  $  per  cent,  on  the  sundry 
debtors  and  25  per  cent,  of  the  net  profit  for  the  year  is  to  be  reserved  for 
commission  to  the  manager.  .... 

Prepare  complete  accounts  in  the  form  which,  m  your  opmion,  is  cal- 
culated to  give  the  greatest  amount  of  information  to  the  directors  as  to 
the  working  results  of  the  business  at  a  glance. 

5.  X.  died  on  31st  May,  1909,  possessed  of  the  following  estate : 

Assets, 

Freehold  Property  (let  at  i6oo  per  annum,  payable  quarterly.  Rent 

received  to  25th  March,  1909) £12,000 

Life  Policies  and  Bonuses ^'Soo 

Cash  at  Capital  and  Counties  Bank lO-ooo 

Cash  in  House ■ ^^ 

Household  Furniture  and  Effects • i»«» 

4%  Debentures  (interest  payable  June  and  December,  interest  re- 
ceived to  31st  December,  1908) 4»500 

Capital  in  X.,  Y.  and  Z. I5i000 

Share  of  Profits  in  X.,  Y.  and  Z.  to  date  of  death Soo 

Liabilities. 

Debts  due  at  death ^^^ 

Mortgage  on  Freehold  Property  (interest  at  4  per  cent.,  payable 

on  usual  quarter  days,  has  been  paid  up  to  2Sth  March,  1909)       3iOOO 

By  his  will  X.  left  his  property  as  under : 

To  his  wife  A.  (an  executrix)  £50  in  cash,  his  household  furniture  and 
effects  (both  free  of  duty),  and  the  income  from  the  residue  of  his  estate 
during  her  lifetime. 

To  his  son  B.  (an  executor)  £50  in  cash  and  his  freehold  property,  both 
free  of  legacy  and  succession  duty. 

To  his  friend  C.  (an  executor)  £50  in  cash,  £500  **  Consols  standing  in 
my  name  at  the  Bank  of  England,"  and  £250,  "  part  of  my  deposit  at  Paris 
Bank." 

To  his  son  D.  the  capital  in  the  business  of  X.,  Y.  and  Z.,  free  of  duty. 

To  his  daughter  E.  £5,000  free  of  duty  and  the  residue  of  his  estate  on 
the  death  of  her  mother. 

On  31st  August,  1909,  the  executors  obtained  probate,  paid  the  estate 
duty,  the  funeral  expenses  (£80),  the  debts  due  at  the  death  and  the 
executorship  expenses  (£177  8s). 

On  29th  September,  1909,  the  mortgage  on  the  freehold  property  was 
paid  off  by  the  executors,  together  with  interest  to  date.  The  legacies 
and  the  devise  were  satisfied  and  the  duties  thereon  paid. 

Assume  that  the  assets  realized  the  amounts  stated,  the  debentures  be- 
ing sold  on  31st  December,  1909,  thaf  all  income  due  to  the  estate  has  been 

373 


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Accountancy  Problems  and  Solutions. 
r^erved,  aj.d  that  cm  Jamiary.  19,0,  the  residue  of  the  estate  was 

^nt  ^nS  ,^1  *'  ''"''  '"""'  3"'  M^'^'  'i""'  »*«  °"t  the  estate  ac- 

count and  the  legacy  account  as  they  should  appear  in  the  executors'  M- 
K«^  and  prepare  a«  mcome  account  for  the  year  and  a  balance  sheet 

be''calt;;I:Srrn*r  •"  '"^'''' '""  '"'''-'  ='"<'  apportionments  .ay 

&  May  a  trustee  legaUy  carnr  on  the  business  of  a  testator'  If  so 
under  what  circumstances,  and  what  are  his  liabilities? 

7-  A  testator  with  an  ample  estate,  left  for  the  most  part  upon  trust  for 
many  years,  gave  an  ammity  to  a  stranger  in  blood  without  any  specific 
"s^Ttfr  X'"  *'  '"'"''  *•'"=''  *"'  t"  P"'-''^  »"ch  annuit7 

»^f y  tLs  tS'"'' "  ^''''  '"^  '™^"^  -^^  """^''^ '"  *'  o*^- 

aTe^^tTnd'hrm'l^  ^^1^^  "''^    ""'^  '^  ^'  ~'  °^  <"'*' 

8.  "A./*  the  sole  executrix  of  a  deceased  testator,  " B./'  whose  will  con 
tamed  no  mstrtictions  as  to  the  investment  of  his  estate,  las  enUtkdto 
the  whole  mcome  of  the  estate  for  her  life  only. 

AJ^TT\f^  ^f  ^'  '^*''*^  ^  P'^P^^y  ^*='d  on  a  long  lease,  valued  at  the 
date  of  death  at  ii,ooo,  and  a  mortgage  of  £2,000  on  a  freehJrproperi'' 

tinl!d  r'"'"^  "^^Tf  '^'''  investments  to  remain  unchanged  and  cL 

ttc  executrix  foreclosed,  and  for  some  years  received  the  rentals     These 

whi  T\  2^7""'  ^'^^^  ^"  ^^^^^  ^^^  '"^^««^  <>"  the  ori^narLrSge 
wh.ch  at  the  date  of  the  death  of  the  executrix  was  £150  fn  arrear    ^  ' 

thf^'Z^r^T'^t  ^T.'^'"  '°^*^  ^y  ^^^^  P^"*^«s  entitled  to  the  capital  of 

estS^and  "'^/Xs^^tet"'  '"'  '"'^^"^  ^^^°^'^"^'  '^^^^*^"  "^•^" 

9.  John  Jones*  profits  for  the  five  years  ended  30th  April  1900  orooerlT 
assessable  for  payment  of  income  tax  (after  allowance  of  ^Tnc^ch 
year  for  schedule  A  assessment  of  his  business  premises)  wHsirer: 

Year  ended  30th  April,  1905 f .  70^ 

m        u  ^  ^       '**** 5.500 

•«         m  M  ..       ^^^ •     4,700 

^909 3,500 

374 


C.  P.  A,  Examination  Papers. 

As  a  director  of  a  limited  company  John  Jones  has  received  £150  in  each 

of  the  five  years.  .     .■  .  *  *^  x.^« 

He  owns  house  property,  the  gross  rentals  of  which  amount  to  HS^ 

which  are  assessed  under  schedule  A  at  £300  net. 
His  wife  has  a  private  income  (taxed  at  its  source)  of  £500  per  annum. 
He  pays  life  insurance  premiums  upon  his  own  life,  amounting  to  £250 

per  annum.  ^      .  ,     ^t. 

State  the  amount  of  John  Jones'  total  liability  for  mcome  tax  under  the 
various  schedules  for  the  year  ended  5th  April,  1910,  and  the  figures  you 
employ  to  arrive  at  your  results. 

10  In  what  cases  is  "  settlement  estate  duty  "  payable  ?  To  what  account 
would  you  charge  the  duty  in  the  trustee's  books,  how  would  it  appear 
in  the  annual  balance  sheet,  and  by  whom  would  it  it  eventually  be  borne? 


Bookkeeping  and  Accounts. 

(Including  Parlneiship  Accounts.) 

I.  A.  and  B.  carried  on  business  as  pottery  manufacturers  at  Hanley, 
under  the  style  of  A..  B.  &  Co.  They  dissolved  partnership  on  31st  March, 
1909,  A.  retiring  from  the  business  and  B.  continuing  to  carry  it  on  under 
the  same  style  and  purchasing  A.'s  share  therein  at  the  amount  shown  as 
his  capital  at  31st  March,  1909,  after  a  proper  revaluation  of  the  assets. 

The  firm's  balance  sheet  at  December  31st,  1908,  was  as  follows: 

Liahilities, 

Sundry  Creditors £5,000 

Bills  Payable 1,500 

Mortgage     on     Land     and 
Buildings  at  4  per  cent..     7,500 

A.,   Capital i4»5oo 

R,       «     9,500 


£38,000 


Land  and  Buildings 

£10,000 

Plant  and  Machinery 

6,000 

Loose  Plant  and  Tools 

.    3,000 

Stock-in-Trade    

9,000 

Sundry  Debtors  after  pro- 

viding    for     Bad     Debts 

and   Discounts 

7,500 

Bills   Receivable 

1,000 

Cash  in  hand  and  at  Bank. 

1,500 

£38,000 

Profits  and  losses  both  of  revenue  and  capital  were  divided  in  the  pro- 
portion of  A,  two-thirds,  and  B.,  one-third. 

The  revaluations  at  31st  March  resulted  as  follows:  Land  and  build- 
ings, £9,100;  plant  and  machinery,  £5,600;  loose  plant  and  tools,  £3,500; 
stock-in-trade,  £8,ooa 

•37s 


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Accountancy  Problems  and  SoluHons. 

Tlie  other  assets  at  that  date  were  agreed  as  follows :  Sundry  debtors 
(after  providing  for  bad  debts  and  discounts).  £8,500;  biUs  receivable, 
iooo;  cash  in  hand  and  at  bank,  i2,ooo; 

The  HabEities  were:  Loan  on  mortgage  at  4  per  cent,  £7,500  (interest 
paid  to  3i8t  December,  1908)  ;  bills  payable,  ii.ooo;  sundry  crditors,  £3,500. 

Make  out  the  necessary  adjustment  accounts  and  balance  sheet  at  list 
March,  1909.  ^ 

2.  What  steps  must  A.,  the  person  referred  to  in  the  previous  question, 
take  to  secure  himself  from  all  risk  of  being  held  Kable  for  any  of  the 
debts  of  the  firm  contracted  after  his  retirement? 

*  /"^'^.r"^^  T"  ^""^^^  ^""^^'^  ^''^"*^^  ^^^'^o""*  i"*  the  foUowing  cases? 

(1)  Where  the  rate  of  exchange  is  stable. 

(2)  Where  the  rate  of  exchange  is  fluctuating. 

Explain  on  what  basis  you  would  incorporate  the  accounts  of  the 
foreign  branch  in  the  head  office  books,  taking  France  as  an  example  of  a 
•table  rate  and  Brazil  as  an  example  of  a  fluctuating  one. 

4.  Henry  Wilson  sold  his  business  to  a  limited  company,  but  agreed  to 
serve  the  company  as  manager  for  a  period  of  ten  years.    The  directors 

"1  l^Z  ^  Vf  xf  ^^^  ^'^^P^"^  ^^  '°"^^  "^^^«"^«  a«^^"st  loss  in  the  event 
of  the  death  of  Henry  Wilson,  decided  to  insure  his  life  for  £10.000.  with- 
out profits,  payable  at  death  or  at  the  end  of  ten  years.  How  should 
theamiual  premiums  on  the  policy  be  treated  in  the  accomits  of  the  com- 
piny  ?    Give    pro  forma  "  journal  entries. 

5.  A..  B..  C  and  D.  carry  on  business  in  partnership  as  engineers  and 
iron  founders.  They  decide  to  convert  their  business  into  a  private  limited 
company  as  on  1st  July.  1909.  The  firm^s  balance  sheet  at  that  date  was 
as  follows: 


Ltabiiities, 

Sundry  Creditors 

Northern  Bank,  Lim.. 
Capital  A 

c 

D 


£7,000 
3,000 
25,000 
15,000 
10,000 

lO/XX) 


£70*000 


Assets, 

Leasehold    Premises £15,000 

Fixed  Plant  and  Machinery  20,000 

Loose  Plant  and  Tools....  10,000 

Sundry   Debtors 7^000 

Stock-in-Trade    i2,'ooo 

Patterns,  Trade  Marks  and 

Patents 5,000 

Cash  in  hand 1,000 


£70,000 


ITic  company  took  over  the  business  at  the  price  of  £66.000   and  in 
addition  paid  the  firm's  liabilities.  ' 

37© 


C.  P.  A.  Examination  Papers. 

The  capital  of  the  company  is  £100,000,  divided  into  35»ooo  6  per  cent, 
cumulative  preference  shares  of  £1  each  and  65,000  ordinary  shares  of  £i 

each. 
The  purchase  price  was  discharged  by  the  allotment  to  A.  of  15,000 

preference  and  10,000  ordinary  shares,  to  B.  15,000  ordinary  shares,  and  to 

C   and  D.  each  10,000  ordinary  shares,  all  fully  paid.    The  balance  of 

£6,000  was  to  be  paid  in  cash  and  divided  amongst  A.,  B.,  C  and  D.,  ui 

proportion  to  their  respective  capitals  in  the  firm. 

The  above  shares  were  duly  allotted  on  first  July,  1909,  and  on  the  same 
date  5,000  preference  shares  were  allotted  to  E.  and  5,000  to  R.  in  pursu- 
ance of  applications  received  from  them,  and  A.,  B.,  C,  D.,  E.,  F.  and  G., 
who  had  signed  the  memorandum  of  association  for  one  share  each,  were 
ordered  to  be  registered  in  the  books  of  the  company  in  respect  thereof, 
and  each  of  them  paid  up  the  £1  due  thereon  on  the  same  day.  On  July 
loth  E.  and  F.  both  paid  up  for  their  preference  shares  in  full,  and  on 
July  18th  the  balance  of  the  purchase  money  was  paid  to  the  vendors. 

Make  the  necessary  entries  in  the  company's  journal  and  cash  book  in 
respect  of  the  above  transactions,  and  open  and  post  up  the  vendors' 
account  in  the  company's  private  ledger. 

6.  What  do  you  understand  by  the  term  "  Novation  "  as  applied  to  part- 
nerships?   Explain  fully  what  is  necessary  to  constitute  "Novation." 

7.  The  City  and  Suburban  Gas  Company  rebuild  and  re-equip  part  of 
their  works  at  a  cost  of  £50,000.  The  part  of  the  old  works  thus  superseded 
cost  £30,000.  The  capacity  of  the  new  works  is  double  that  of  the  old. 
£2,000  is  realized  by  the  sale  of  old  materials,  and  old  materials  valued  at 
£1,000  are  used  in  the  reconstruction  and  included  in  the  cost  of  £50,000 
above  mentioned.  The  cost  of  labor  and  materials  is  10  per  cent,  higher 
now  than  when  the  old  works  were  built. 

Give  the  journal  entries  for  recording  the  above  transactions  in  the 
books  of  the  company,  showing  particularly  what  amount  you  consider 
should  be  charged  to  capital  expenditure  and  stating  your  reasons  for 
your  decision. 

8.  What  is  the  Bankers'  Clearing  House?  Explain  shortly  the  system 
on  which  it  is  worked,  taking  for  the  sake  of  example  four  banks.  A,  B., 
C.  and  D. 

9.  Smith,  Jones  and  Robinson  are  partners.  Robinson  has  a  salary  of 
£200  per  annum,  and  the  profits  of  the  firm  after  paying  his  salary  are 
divided  equally  between  Smith  and  Jones  until  they  have  received  £500 
each,  after  which  the  balance  is  divided  equally  amongst  the  three. 

The  profits  of  the  firm  for  the  year  1907  were  agreed  with  the  Surveyor 
of  Taxes  at  £1,400,  and  for  1908  at  £1,500. 

For  1909  the  profits  after  charging  Robinson's  salary  were  £800.  Smith 
held  £6,000  Midland  Railway  3J^  per  cent,  debenture  stock,  Jones  owned 

377 


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Accountancy  Problems  and  Solutions. 
tile  house  he  lived  in  vrhi^u 

Robi«so„  had  no  o.htl^t  oHntre""  "  ^  '^°"  """''  ''=''«""^  ^■ 
per  r„t '"'  ""™"  "'^--^  —ted  to  i^  and  Jone,'  to  ^30 

Prepare  the  firm's  return   fn 
mums,  claiming  abatement  anT  aTsoT^Vf"  '"^  '*^'  "^"^'"'^  ''P^^^'- 
and  show  what  will  be  the  alum  t^et^^  winT"'  ''  ^'™^  ^"^°'"^' 
upon  for  the  year  1910-19,,.  ^'"^  "^^^  ^^^^  *^  P^y  «come  tax 

la  What  do  you  understand  W  *u^  *  «« 

basis   or  bases   do  ^r^,7        -^       •  ^^^  ^^'■™'     ^n  Cost"?  Upon  what 

u«t!,es   ao  you   consider  it   shnnW   k«       t    1      j\  *^         "^' 

reasons.                                              "   snoum   be  calculated?  Give  your 


Auditing. 

I-  As  auditor  to  a  limited  ,-«.««-. 

(2)  Patents. 

(3)  i5,ooo  Chinese  Bonds. 

(4)  Loan  secured  by  mortgage  on  freehold  property. 

ai>Pear  in  .He  P"b.i Jhe/ LltTh'eT oTf  rpt;°"°"'"«  "^"^  ^'''^ 

Q     J  Liabilities. 

Sundry  balances  and  accounts  not  closed /,  o,^    «        . 

P    .  Assets. 

^.679,274    7s.    od. 

oaL^!r  ^f  T"^  ^'^^"^  appeared  amongst  the  asset,  nf  .  r  ,.• 

Pany,  of  which  you  are  the  auditor :  Colhery  Com- 

Short  workings. 

Explain  its  meaning,  and  statV  "«,'L*i, ", ^^'^^ 

would  allow  it  to  be  tf;ated  as  an  al^ef        ^"'  °"  "''^^  --"ditions  you 

4-  The  annual  accounts  of  thi.  niA  d    t  t  . 
foHowing  items:  '  ^^^  ^"'"^^^^^^  Bank.  Lim.,  contain  the 

(a)  ^ash  in  Bank  of  England... 

(b)  ^-^j^fand  a„^^^^^^^^  is6o,.54 

(c)  Money  at  Call  and  shori  Notice ^72,124 

(d)  Rebate  on  Bills  not  due 72i,s6o 

To  What  investigation  shonM  yo^^  as^  a^diio:.' sn,™;.  ;,;  ^^^^  ,^ 


C.  F.  ^.  Examination  Papers. 

5.  What  is  the  difference  in  principle  between  the  balance  of  the  capital 
account  of  a  British  railway  company  as  shown  in  the  statutory  form  of 
accounts  and  the  statement  of  capital  account  of  a  limited  company  as 
shown  in  the  annual  balance  sheet?  State  briefly  your  duties  as  auditor 
in  each  case  with  reference  to  such  accounts. 

6.  Give  four  examples  of  "  closing  entries  "  which  you,  as  auditor  of  a 
firm,  would  expect  to  find  in  the  journal  at  the  annual  audit,  and  state 
your  duties  with  regard  to  them. 

7.  As  auditor  of  a  registered  building  society  you  are  required  to  certify 
that,  at  the  audit,  you  "have  actually  inspected  the  mortgage  deeds  and 
other  securities  "  for  loans  granted  by  the  society.  To  what  extent  should 
your  inspection  go  so  as  to  cover  your  responsibility? 

8.  Goodwill  for  a  large  amount  appears  amongst  the  assets  of  the 
Barchester  Brewery  Company,  Lim.,  a  company  formed  during  the  brewery 
"Boom."  The  profits  of  the  company  have  gradually  decreased  during 
the  past  few  years,  and,  in  the  years  ended  June  30th,  1908  and  1909, 
while  the  dividend  was  paid  on  the  preference  shares,  no  profits,  were 
available  for  dividends  on  the  ordinary  shares.  The  balance  at  the  credit 
of  the  profit  and  loss  account  for  the  year  ended  June  30th,  1910,  was 
sufficient  (after  satisfying  the  preference  shareholders  to  pay  a  dividend 
of  2^/^  per  cent,  on  the  ordinary  shares.  The  directors  were  divided  in 
opinion  as  to  whether  a  dividend  should  be  declared  or  the  amount  taken 
to  the  credit  of  the  goodwill  account  As  auditor  to  the  company  you 
were  called  in  to  advise  the  directors.  State  briefly  the  views  which  you 
would  have  submitted  to  the  board. 

9.  When  auditing  the  books  of  a  firm  you  find  that  no  bill  transactions 
are  recorded  in  the  firm's  books  until  the  bills  have  matured.  Give  your 
opinions  upon  this  method,  and  show  how  the  balance  sheet  of  the  firm 
would  be  affected. 

,0.  In  auditing  the  books  and  accounts  of  trustees  under  a  will  or  settle- 
ment, what  special  matters  have  to  come  under  your  view  that  do  not 
occur  in  the  audit  of  a  business  concern,  and  how  would  you  deal  with 
them? 


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Practical  Accountiiig— Part  I. 

Twdaj,  June  27,  1911—1.15  to  4.15  P.  M.  only. 

<«^rs  only.  designatinriTnLb.^l  'f"*  "'"*""''  '""  "»'"" 

»*.  number  of  each  oToftHeZeZ.T  '"  T'"""  '"'^"'-    ^*«*  <*') 

LL':S?I  Tcce,Z         ''  """"     ^"''^   -"■«'"   '"   «  -  «-' 

January  i.  ,9,0:  ^     "'  '''*°'^  ""''•  '^"^  *«  'o"""'"*  fact. 

Cash  (miprest  fund)  $500;  raw  materials  $17,688  «•  wa«,  .,n„aM  .  j 
distributed  $z,34a67-   irood«   in   n,„~.o        *'7.w».5i,  wages  unpaid  and 

finished  goods  ^5,2902^  ***''^  ^"  management  charges; 

The  invoices  for  purchases  of  raw  materiale  f^^  *u^ 
$78^7^.6^-  wairi.«  nTw  tr,,I.      "     ™^**"***  ^or  the  year  amounted  to 
wo,j/3.D5,  wages  paid  ^i33»04i-27:  manairement  rliar.»Ac  «.-,/;«-    x  _^ 

^^^and  for  xx  months'  sale  of  power  I330.  the  twelfth  montll  1^^ 

The  raw  materials  consumed  during  the  period  amounted  to  *6d  .88  «• 
management  charees  distrihntrrf  Sei?  •#:,„,  *  -^  "umcu  10  ♦04,188.33; 
to  costs  amounted^  too..!  Tlt^'f!'  ^f"*^^,  ^^P^"^*^  ^»*"»>uted 
placements  of  $45  '''"*  *  ^^'^  ^"  '""^^^^^^'^  ^^- 

« J!?I  !"'f  "'*  ^J"^"^  ^'^^P"*  ^^'^  ^^  y^'  ^^o-^t^l  to  $324,583  43  includ 
iiW  all  costs,  and  the  transfers  to  the  main  office  were  $3X9^ 

undL'LleTt^'Jl^^^      "^'"^^  ^''  '^'^  *^^-  remained  unpaid  and 

averajre  rate  of  ^c^^*!^  u  '^  !?"  ""^  operatives*  overtime  at  an 
7Z^  r  .  ^,  "**  '*^''  ''°"^'  P*^"^  0"  a  basis  of  2%  hours  over- 
time  as  the  equivalent  of  354  hours  regular  time. 

Raise  all  the  ledger  accounts  affected  and  show  final  trial  balance. 

2.    A.  contracts  with  a  textile  establishment  to  sell  the  mill's  annual 
output  on  the  following  conditions :  ^""*' 

The  mill  is  to  bill  the  output  to  A  at  cn^t     A   .v  ♦^  c  .t. 

the  i»xfi»fif  nf  'reoiL    t       .  .  ^°®t-    A.  IS  to  finauce  the  mill  to 

the  extent  of  75%  of  cost  on  receipt  of  goods.  The  balance  is  to  be  remit- 
ted by  A.  as  the  various  shipments  are  sold,  less  5%  and  advances  At 
the  end  of  a  year  an  analysis  of  A.'s  affairs  rev*^k  fhl%^Vi  .  *"*^*'^:  ^^ 
by  his  books   thi.  ^r^A.  V  •  1 J^  ^^^"i  reveals  the  following  as  shown 

nurT  i^      '      I  ^    ^^  ^'^"'^  ^°***  **  ^*>*  profit  above  the  factory  cost 
[Mill  shipments  $7,327,918.18.]  lacioiy  cost. 

380 


• 


C.  P.  A.  Examination  Papers. 

Debits.  Credits. 

Mill  advances •  •    $5f545,938  $5i000,ooo 

Mill   sales 6,400,000  7*840,710 

Freight  and  cartage 90,000  80,000 

Customers    •••       7.840,710  7,632,200 

Cash  7,610,200  5,635,938 

Discounts  22,000 

Commission   32Q1OOO 

Mill  account 1,000,000 

$27,508348    $27,508348 
Prepare  A's  financial  statement. 

3.  Philip  Jones,  a  citizen  of  New  York  State,  died  April  i,  1909,  leav- 
ing a  will  appointing  four  executors.  The  will  was  probated  May  i,  1909, 
showing  the  following  bequests : 

X.  %  share,  B.  J4  share,  C.  A  of  the  entire  estate  after  payment  of 
funeral  expenses,  debts,  etc.,  a  specific  bequest  to  the  A.  Hospital  consist- 
ing of  $20,000  and  a  parcel  of  improved  property  valued  at  $50,000. 

The  inventory  filed  by  his  executors  was  as  follows:  5%  mortgage  for 
$40,000,  interest  payable  semi-annually  on  June  30  and  December  31 ;  500 
shares  common  stock  of  Industrial  Company,  par  value  $100,  appraised 
@  no;  50  5%  first  mortgage  bonds  of  A.  Railway  Company,  par  value 
$100,  appraised  @  104,  interest  payable  semi-annually  on  March  i  and  Sep- 
tember i;  accounts  receivable  valued  at  $20,000;  cash  in  banks  and  on 
hand,  $69,250 ;  household  furniture  and  effects  appraised  at  $5,500. 

The  executor's  transactions  were  as  follows: 

Cash  Receipts. 

500  shares  of  Industrial  stock  sold  @  $115  per  share. 

45  first  mortgage  bonds  sold  July  i  @  iii  and  accrued  interest. 

Accounts  collected  $18,500  (balance  worthless). 

6%  dividend  on  Industrial  stock  declared  May  i,  1909. 

Interest  on  bank  balances  $1,300,  of  which  $400  accrued  prior  to  testator's 

death. 
Interest  on  bonds  and  also  on  mortgage  duly  collected. 
Rents  collected  $4,000,  of  which  $1,500  accrued  prior  to  death  of  testator. 
The  household  furniture  and  effects  were  taken  by  X.  at  the  appraised 

valuation. 

Cash  Payments. 

Funeral  expenses $2,000 

Expenses  of  probating  will 335 

General  legal  services 1,000 

Rent  of  safe  deposit  vault 50 

Care  of  cemetery  lot,  etc. 500 

381 


lilll^'l 


li  I 


If 


lijj I 


II  '! 


Accountancy  Problems  and  Solutions. 

Premium  on  executors'  bonds 

Stationeiy,  postage,  etc [[[[[ •  •  •  loo 

Debts  of  deceased . •  •  ■  12c; 

Taxes 12,865 

X.  on  account  of  legacy 1*025 

C  on  account  of  legacy •  12,000 

•  •  • 20,000 

S%  njortgage,  $40,000. 

^^S^xTT^'  *""'*  °*  A-  ««"*'"  Company, 
merest  on  X  s  advances  amounts  to  $350  and  on  C's"^  advances  $575. 

Frepare  (a)  a  summary  statement  qi»naraf;«^  ««•    •    i 
.statement  showing  amounts  le  S  arief 'rT'  » ?"*  '""^''  <"> 
the  commission  due  executors.         '^"*'«='"'«»'  (<=>  a  statement  showing 


Practical  Accouniiiig— Part  IL 
W«J.erf^.  J„^  28.  191 1-9.15  A.M.  to  12.15  P.M,  onl,. 

Answer  ivm  questions  but  nn  Mt/>«>«      a 
""»««•*  only,  designating  by  «««a^"  '^'"'   ««"'«'»•«   *«'   u>ritf 

soite  Ll;^^''"";^  '™  •^•^"^  »'  *'-  P»«ners  agreed  to  dis- 

The  original  investments  contributed  Ta«.«^  « 

A.,  cash  f, 00^000,  B.,  cash  C»^  C   C^  'r't"'  ""'.  "''  '""""'^ 
cr«Jited  with  $80,000  and  his  se^l^'t^'  &Lfh/  *=""''»' "r"""  *»* 
as  collateral  for  the  same  Exchange  held  by  the  firm 

wi*d'rawTo::!^V„rchTr"'  T^T.T'  ^"'""-r  ^"='--  ^-  ^  ""-«•  to 
$.5,000  and  charge  ImeT^ni"  Tra'iln  H  ''"°*"'  '"  *'*<'^='" 
and  charge  same  to  expense  *°  withdraw  $20,000 

ortTt^rsS'eSS  ^'^  -  —  <»  original  amount,  profits 
^^T*e  interim  transactions  during  the  year  as  transcribed  from  the  blotter 

Jar^nii'-^  '""'"•  ^'  ^'"«=  '•'««  -«*'  'o^  *'.oos.ooo.  maturing 


C.P.  A.  Examination  Papers. 

Purchases  of  stocks  for  customers,  long,  50,000  shares  (par  value  $100) 
for  $4,750,000. 

Sales  of  stocks  for  customers,  short,  50,000  shares  (par  value  $100)  for 
$4,625,000. 

Margin  received  in  cash  from  customers,  long,  $500,000. 

Margin  received  in  cash  from  customers,  short,  $500,000. 

The  following  loans  were  made  from  banks  on  securities : 

On  bonds  $750,000;  interest  paid  in  full  to  Dec.  31,  iQio,  $32,500. 

On  stocks  $150,000;  interest  paid  in  full  to  Dec.  31,  1910,  $6,000. 

To  complete  transactions  for  account  of  customers  all  stocks  were  either 
borrowed  or  loaned. 

The  earnings  comprised,  commissions  $i7S,ooo  received  in  full,  interest 
receivable  $85,000,  of  which  $70,000  was  collected. 

The  expenses  were  $62,500  (exclusive  of  partners'  allowances  or  interest 
paid  on  capital),  of  which  $2,500  remained  unpaid  at  time  of  dissolution. 

The  partners  had  withdrawn  as  follows :  A.  $16,500,  B.  $18,750,  C.  $18,- 
500.  The  market  value  of  the  bonds  was  $1,004,500.  The  Stock  Exchange 
seat  was  finally  sold  to  B.  for  $85,000,  the  profit  therefrom  reverting  to 
the  firm. 

Prepare  statements,  prior  to  dissolution,  showing  (a)  cash  receipts  and 
disbursements  and  balance  on  deposit  in  bank,  (b)  income  and  expendi- 
tures, (c)  condition  at  time  of  dissolution,  (d)  partners'  respective  capital 
accounts. 

5.  The  Prosperous  Company  is  organized  under  the  laws  of  the  State 
of  New  York  to  conduct  a  manufacturing  business.  The  authorized  cap- 
ital is  $500,000,  divided  into  $250,000  common  and  $250,000  preferred  stock, 
par  value  of  shares  $100.  Five  incorporators  subscribe  each  for  one  share 
of  common  stock  at  face  value.  John  Peters,  one  of  the  incorporators, 
purchases  from  three  manufacturing  companies  their  complete  plants  for 
$499,500  and  transfers  said  plants  to  the  Prosperous  Company  for  the  re- 
maining $499,500  of  common  and  preferred  stock  and  $100,000  of  first 
mortgage  5%  bonds  out  of  a  total  issue  of  bonds  amounting  to  $150,000, 
leaving  $50,000  of  bonds  in  the  treasury.  The  incorporators  then  pay  in 
cash  for  their  respective  subscriptions. 

The  individual  assets  acquired  are  as  follows:  land  and  buildings 
$75,000;  plant  and  machinery  $200,000;  tools,  equipment  and  fixtures  $50,- 
000;  inventories  $100,000;  accounts  receivable,  good  $28,000,  doubtful 
$5,000;  cash  $12,000. 

Prepare  (a)  opening  entries  for  the  books  of  the  Prosperous  Company, 
(b)  initial  balance  sheet  showing  the  company's  financial  condition. 

6.  From  the  following  figures  of  net  sales,  costs  and  expenses  prepare 
a  statement,  accounting  for  the  shrinkage  in  profits  in  1910  and  showing  in 
dollars  and  cents  what  portion  of  such  shrinkage  is  due  to  decreased  sales 

383 


I 


Accountancy  PrQbUms  and  Solutions, 

ind  what  portion  is  occasioned  liy  the  various  variations  in  cost  and  ex- 
pense items: 

Jlf.*^^"f*, ••• 1230,500  $265,335 

Direct  labor ^g^joo  106,228.75 

Indirect  labor 6725  8,379 

Factory  expenses 27,500  26,999 

Trading  expenses 23,500  20,947.50 

Office  expenses , ,        ,0^500  11,637.50 

Net  sales $390,750  $465,500 


N.  B.— The  solutions  to  questions  1,  3  and  5  appear  in  Part  I  as  prob- 
lems Nos.  38,  39  and  40. 


Theory  of  Accounts. 
Tuesday.  Jime  27,  f91 1^9.15  A.  M.  to  12.15  P.  M..  only. 

Answer  10  questions  but  no  more,  selecting  at  least  two  questions  from 
each  group.  Answers  in  excess  of  the  number  required  will  not  be  con- 
sidered. Do  not  repeat  questions  but  write  answers  only,  designating  by 
number  as  in  question  paper.  Check  (  /)  the  number  of  each  one  of  the 
questions  you  have  answered.  Each  complete  answer  will  receive  10 
credits.    Papers  entitled  to  75  or  more  credits  will  be  accepted. 

GROUP  I. 

I.  What  books  of  account  do  you  consider  necessary  for  the  conduct 
of  a  small  business  ?    Describe  their  form  and  use. 

'  2.    What  general  order  do  you  suggest  for  arranging  the  accounts  when 
only  one  ledger  is  necessary  for  a  moderate  business? 

•  3.  Mention  the  different  kinds  of  ledgers  that  you  would  install  in  a 
concern  where  the  transactions  were  large  and  varied. 

«■  4,  Describe  fully  the  construction  of  a  profit  and  loss  account.  What 
varioiis  meanings  may  its  balance  have  and  how  should  it  be  treated  in 
lIMferent  organizations  under  which  business  is  conducted? 

S    At  the  end  of  a  fiscal  year  a  concern  inventoried  its  raw  material  at 
cost.    Do  you  approve  of  this  method?    State  your  reasons  fully. 

J84 


C.  P.  A.  Examination  Papers. 

GROUP  II. 

6  A  corporation  organized  under  the  laws  of  the  State  of  New  York 
has  a  capital  of  $200,000,  viz.,  1,000  shares  common  and  1,000  shares  pre- 
ferred stock,  par  value  $100  each.  The  patents  were  bought  of  the  pat- 
entee for  $50,000  common  and  $50,000  preferred  stock.  The  patentee 
donated  one  half  of  each  issue  of  his  stock  to  the  company  for  its  use  in 
securing  additional  capital.  Show  entries  necessary  to  record  these  trans- 
actions and  state  what  accounts  you  would  set  up  in  relation  thereto. 

^  7.  A  mining  corporation  has  assets  comprising  among  others  leases, 
good  will,  patents,  rent  and  royalties  paid  in  advance.  How  would  you 
deal  with  them  in  the  profit  and  loss  account  and  balance  sheet? 

•^8.  The  Hayward  Company  has  declared  a  dividend  of  10%  on  its 
capital  stock  of  100,000,  payable  July  i,  1910;  stock  books  close  on  June 
15,  1910.  Describe  the  accounting  procedure  incident  thereto  and  state 
who  may  participate  in  the  dividends. 

•  9.  In  closing  the  books  of  a  corporation,  how  would  you  value  goods 
consigned  at  selling  prices  to  customers  under  an  agreement  by  which 
consignees  pay  for  goods  as  used? 

*  la  The  books  of  a  corporation  show  balances  at  the  debit  or  credit  of 
the  following  accounts :  rents  from  tenements,  reserve  for  accounts  receiv- 
able, depreciation  on  machinery,  depreciation  on  furniture  and  fixtures, 
bond  redemption  account,  bills  receivable,  dividend  on  preferred  stock. 
State  which  should  enter  into  profit  and  loss  account  and  which  should 
appear  in  balance  sheet    Why? 

GROUP  III 

^11.  A  fire  insurance  company's  assets  include  stocks  and  bonds  that 
it  carries  at  market  price  regardless  of  cost  Is  this  in  accordance  with 
your  views?    Give  reasons. 

•^12.  Describe  the  process  of  closing  the  books  of  a  corporation  at  the 
end  of  its  fiscal  year,  showing  trading  account  and  profit  and  loss  account, 
caption  and  allocation  being  a  prerequisite. 

13.  Describe  the  method  of  determining  the  number  of  shares  of  capital 
stock  held  by  each  of  the  several  stockholders  of  a  corporation,  giving 
fully  the  titles  of  the  books  in  which  the  facts  are  registered  and  stating 
how  the  books  should  be  opened  and  operated. 

*I4.  A  company  leases  for  a  term  of  50  years  certain  unimproved 
property  for  factory  purposes,  paying  a  ground  rent  of  $1,000  per  year. 
The  company  erects  certain  buildings  thereon  for  its  own  use  at  a  cost  of 

385 


Accountancy  Problems  and  Solutions. 

$40*000,  which  arc  to  become  the  the  property  of  the  owner  at  the  expira- 
tion of  the  lease.  State  how  you  would  treat  this  propositions  in  the 
compan/s  books  of  account 

IS  The  budget  of  a  municipality  includes  appropriations  for  seven 
separate  departments.  Set  up  such  accounts  as  you  believe  will  cover  the 
financial  operations  incident  thereto,  with  supposed  receipts  and  disburse- 
ments. 


w 


Auditing. 
;  June  28.  1911—1.15  to  4.15  P.M.,  only. 

Anszifer  10  questions  but  no  more,  selecting  at  least  two  questions  from 
mck  group.  Answers  in  excess  of  the  number  required  will  not  be  con- 
sidered. Do  not  repeat  questions  but  write  answers  only,  designating  by 
number  as  in  question  paper.  Check  ( yf)  the  number  of  each  one  of  the 
questions  you  have  answered.  Each  complete  answer  will  receive  10 
credits.    Papers  entitled  to  75  or  more  credits  will  be  accepted. 


GROUP  h 


I.    Define  auditing. 


2.  If  called  on  to  verify  the  merchandise  account  of  a  manufacturing 
concern,  what  steps  would  you  take  to  make  the  necessary  investigation? 

3.  The  cash  of  a  concern  had  not  been  proved  at  any  regular  period  and 
at  the  date  of  the  audit  the  pass  book  had  not  been  balanced  with  the 
bank.  How  would  you  proceed  to  prove  the  correctness  of  the  cash 
balance  as  shown  by  the  cash  book  ? 

'4.  What  would  be  your  procedure  in  examining  the  capital  stock  books 
of  a  corporation?  What  books  would  you  require?  Give  reasons  why 
such  an  audit  may  be  necessary. 

S  Give  a  brief  report  of  the  affairs  of  a  small  manufacturing  concern. 
What  points,  in  your  opinion,  call  for  special  attention  ? 

* 

GROUP  11. 

#«■ , 

6.  In  auditing  the  affairs  of  a  railway  company,  how  should  the  auditor 
determine  whether  or  not  the  earnings  are  correctly  stated? 

'7.  An  auditor  who  is  employed  to  close  the  accounts  of  a  firm  and 
p^ptre  a  balance  sheet  finds  that  the  current  work  is  behind  and  that  no 
trial  balance  has  been  effected  for  over  a  year.    How  should  he  proceed? 

386 


C.  P.  A.  Examination  Papers. 

*8.  Describe  the  steps  necessary  to  m»ke  a  complete  audit  of  a  savings 
bank. 

*  9.  A  company  takes  a  large  number  of  notes  (bills  receivable)  from  its 
customers  and  when  in  need  of  funds  discounts  or  sells  them.  What 
accounts,  if  any,  should  appear  to  care  for  the  contingent  liability  thus 
created  to  satisfy  you  as  auditor? 

"10.  Set  forth  in  detail  and  in  order  of  importance  the  instructions  you 
would  give  an  assistant  in  the  audit  of  an  electric  railway,  a  bank,  a  stock 
broker. 

GROUP  III. 

''ii.    State  in  detail  the   successive   steps  to  be  taken  in  auditing  the  - 
accounts  of  an  executor  of  an  estate. 

''la.  Give  examples  of  such  assets  and  liabilities  not  usually  found  on 
books  of  account,  as  should  be  considered  by  the  auditor  when  preparing 
an  income  and  profit  and  loss  account  at  the  close  of  a  fiscal  period. 


"*"  13.    What  method  should  an  auditor  employ  in  determining  the  value  of 
stock,  of  accounts  receivable,  of  additions  to  plant  and  property  account? 

*"i4.    Wha^  conditions  would  influence  you  in  fixing  the  rate  of  deprecia- 
tion on  buildings,  machinery  and  tools,  fixtures  and  patterns? 

JUi. 

15.  Describe  your  mode  of  procedure  in  connection  with  some  audit  on 
which  you  have  been  engaged.  Relate  the  nature  of  the  business,  answer- 
ing in  sufl5cie?it  detail  to  enable  the  examiners  to  form  an  opinion  regard- 
ing your  knowledge. 


Commercial  Law. 

Thunday,  June  29,  1911-9.15  A.  M.  to  12.15  P.M.,  only. 

Answer  jo  questions  but  no  more,  selecting  at  least  two  questions  from 
each  group.  Answers  in  excess  of  the  number  required  will  not  be  con- 
sidered. Do  not  repeat  questions  but  write  answers  only,  designating  by 
number  as  in  question  paper.  Check  ( >f)  the  number  of  each  one  of  the 
questions  you  have  answered.  Each  complete  answer  will  receive  10 
credits.    Papers  entitled  to  75  or  more  credits  will  be  accepted. 

GROUP  I. 

I.  Define  (a)  insurance,  (b)  insurer,  (c)  insured,  (d)  premium,  (e) 
risk,  (f)  insurable  interest. 

387 


•* 


^ 


Accountancy  Problems  and  Solutions. 

3.    Define  (a)  partnership,  (b)  ostensible  partner,  (c)  dormant  partner 

d    corpora  , on   (e)  stockholder,  (f)  comm^  stoci,  (g)  preferreTs^' 

(h)  certificate  of  deposit  picicrrca  stock, 

^  Classify  estates  in  land  with  respect  to  their  duration  and  define 

(A^  .f^f"^  f'  foDowing:  (a)  will,  (b)  abstract  of  titi,^,  (c)  guardian 
(d)  trust,  (e)  certified  check.  Buaruian, 


GROUP  IL 
ti^    ^r\*f  '"^  necessary  for  the  formation  of  a  joint  stock  associa- 
wjiat  respects  does  it  resemble  a  corporation? 

in  wriSg?  '''"*'^''''  ""^''  '^'  ^'^  ^"^^  ^*^*"*«  ^^  F^-"ds.  must  be 

HatilitTof  a'ToiZ"'"  '""'"  ""^'^  ''"^  ^^  ^ork  law?  State  the 
liability  of  a  common  carrier  at  common  law,  under  the  New  York  law 

To  what  extent  can  the  carrier  limit  his  liability  under  thTlatter  lal? 
To  what  special  supervision,  if  any,  are  common^carriers  subjS 

prLn^em  of'  ^^^^*^f  tt^"'*'"'"'"*'  ^"^  ^^^'  constitutes  a  sufficient 
presen^^^^^^^  '"'''""'^"*   '^^  P^^^"*?     Where   should 

presentment  be  made?    When  may  presentment  be  dispensed  with ^    What 
constitutes  a  material  alteration  in  a  negotiable  instrument? 

lo.    Give  the  substance  of  the  statute  providing  for  the  rendering,  of 
financial  statements  by  a  corporation  to  its  stockhofders'  ^ 


GROUP  III. 
II.    A.,  the  owner  of  real  estate,  dies  intestate,  leaving  no  children  but 

the  child  of  a  deceased  daughter.    To  whom  does  the  real  estate  descend 
and  in  what  proportion?  aescena 

iz    A.  and  B.  are  partners.    If  C.  recovers  a  judgment  airainst  A   for 
a  personal  debt  may  a  firm  chattel  be  sold  to  sa  isfy^Ws  ^^Ten^^    U 

a  partner  with  B.  and  has  he  any  rights  as  to  an  accounting  from  B? 

388 


C.  P.  A.  Examination  Papers. 

13.  A.  owes  B.  money  on  a  gambling  debt.  B.  employs  C.  to  collect  the 
same,  agreeing  to  pay  him  25%  of  the  amount  collected.  C.  persuades  A. 
to  pay  the  debt,  the  total  amount  thereof  going  to  B.  in  the  first  instance. 
Later,  C.  sues  B.  to  recover  his  proportion  for  the  coUectioa  Will  he 
succeed?    Give  reasons  for  your  answer. 

14.  A  bank  certified  a  check  that  had  been  altered  by  changing  the  date, 
name  of  payee  and  by  raising  the  amount,  and  the  bank  subsequently  paid 
the  same  to  the  defendant.  Subsequently  thereto,  the  bank  sued  the 
defendant  for  the  amount  thus  paid.  Can  it  recover  ?  Or  does  its  certifica- 
tion of  the  check  amount  to  a  warranty  of  the  genuinenesss  of  the  body 
of  the  check  as  to  payee  or  amount?    Explain. 

15.  May  a  stockholedr  object  to  an  act  of  his  corporation  as  ultra  vires 
after  he  has  acquired  and  accepted  pecuniary  benefit  thereunder,  when  such 
act  is  neither  malum  prohibitum  nor  malum  in  se? 


^ 


IM 


Summary  of  the  Federal  G>rporation  Tax  Law. 

The  Federal  Corporation  Tax  Act,  which  is  given  in  full  in  the  appen- 
dix, is  one  of  the  most  important  laws  passed  in  recent  years  by  the  Con- 
gress; it  affects,  according  to  the  report  of  the  Commissioner  of  Internal 
Revenue  for  1910,  corporations  with  a  total  capital  stock  of  $52,371,626,752 
and  with  a  bonded  indebtedness  of  $3i,333,9S2,ooo.  Every  one  of  those 
corporations  has  to  make,  in  accordance  with  the  requirements  of  the  Tax 
Act,  a  yearly  report,  and  has  to  pay  an  excise  tax  of  one  per  cent.  (1%) 
on  all  net  income  above  $5,000. 

The  primary  object  of  the  lawmakers  was  to  produce  revenue;  the  title 
of  the  Act,  however,  sets  out  that  one  of  its  objects  is  to  encourage  the 
industries  of  the  United  States;  according  to  others,  again,  the  tax  was 
levied  solely  as  the  result  of  a  popular  clamor  for  publicity  with  regard  to 
corporation  affairs.  Respecting  the  last  two  objects,  A.  W.  Machen,  Jr., 
says  in  his  Treatise  on  the  Federal  Corporation  Tax  Law  of  1909 :  "  The 
industries  of  the  United  States  are,  to  a  vastly  preponderating  extent, 
carried  on  by  corporations  which  are  subject  to  this  tax,  and  it  would  be 
a  poor  way  to  *  encourage '  them  to  impose  on  them  such  heavy  burdens 
and  to  subject  them  on  mere  suspicion  to  such  inquistorial  examination 
and  ruinous  publicity  as  to  compel  many  of  them  to  quit  business."  It  is 
a  well-known  fact  that  many  concerns  in  the  United  States  during  the  last 
year  have  changed  from  the  corporate  form  of  doing  business  to  partner- 
ships and  associations,  which  is  certainly  not  an  illegitimate  way  of  evading 
the  tax. 

Of  special  importance,  however,  is  a  thorough  study  of  the  tax  law  for 
every  member  of  the  accountancy  profession.  Their  services  are  needed 
by  the  corporation  when  determining,  in  accordance  with  the  requirements 
of  the  Act,  what  is  the  gross  income  and  what  deductions  may  be  made 
legitimately  in  order  to  arrive  at  the  taxable  amount  of  net  income.  It  is 
within  his  province  to  interpret  the  inexact  nomenclature  of  the  Act  and 
to  reconcile  it  with  the  accounting  principles  with  which  it  is  only  too  fre- 
quently at  variance.  To  accomplish  that  task  intelligently,  it  is  of  prime 
importance  for  the  practicing  accountant  to  be  acquainted  not  only  with  the 
text  of  the  law  but  also  with  its  interpretation  by  the  courts. 

Following  is  a  summary  of  the  Corporation  Tax  Act,  followed  by  a 
synopsis  of  decisions  relating  to  it : 

The  chief  provisions  of  the  law  may  be  summarized  as  follows: 


I.  Every  domestic  corporation,  joint  stock  company,  or  association 
organized  for  profit  and  having  a  capital  stock  represented  by  shares,  shall 
be  subject  to  a  tax  of  one  per  cent.  (1%)  on  the  entire  net  income  over 
and  above  $5,000,  exclusive  of  dividends  obtained  from  corporations  on 
which  the  tax  is  imposed,  received  by  it  in  each  calendar  year,  beginning 
with  the  year  ending  Dec.  31,  1909. 

393 


Accountancy  Problems  and  Solutions, 

Every  foreign  corporation  doing  business  within  the  United  States  shall 
be  subject  to  the  same  conditions  on  business  transacted  and  capital  in- 
vested in  any  state  or  territory  of  the  United  States. 

In  Article  i.  Appendix,  p.  402.  lines  9  and  10,  we  find  the  words  "...  a 
special  excise  tax  with  respect  to  the  carrying  on  or  doing  business  .  .  ." 
These  words  are  essential  in  determining  the  constitutionality  of  the  law, 
as  this  tax  resembles  greatly  an  income  tax,  which  is  against  the  Constitu- 
tion. The  courts  have  decided,  however,  that  the  amount  of  income  serves 
only  as  a  measurement  of  the  tax,  the  latter  being  in  reality  a  levy  on 
business. 

II.  Article  2  lays  down  rules  and  definitions  for  determining  the  gross 
income  of  corporations  classified  as  follows:  (i)  Banks  and  other  financial 
institutions  and  insurance  companies,  (2)  transportation  companies,  (3) 
manufacturing  companies,  (4)  mercantile  companies,  and  (5)  miscel- 
laneous companies. 

III.  The  following  deductions,  specified  in  Articles  3  and  4,  may  be 
made  from  the  gross  income  in  order  to  ascertain  the  taxable  net  income : 

1.  All  the  ordinary  expenses  actually  paid  within  the  year  in  main- 
tenance and  operations  of  the  business  and  its  properties. 

2.  All  losses  actually  sustained  within  the  year  and  not  compensated 
by  insurance  or  otherwise,  including  a  reasonable  allowance  for  deprecia- 
tion of  property',  if  any,  accrued  during  the  year  in  the  value  from  exhaus- 
tion, wear  and  tear,  or  obsolescence,  when  the  loss  has  not  been  made 
good  by  payments  for  ordinary  maintenance  and  repairs  deducted  under 
the  heading  of  expenses  of  maintenance  and  operation  or  in  the  ascertain- 
ment of  gross  income;  and  in  the  case  of  insurance  companies  the  sums 
other  than  dividends  paid  within  the  year  on  policy  and  annuity  contracts 
and  the  net  additions  to  the  reserve  as  required  by  law. 

3.  Interest  aciuatly  paid  within  the  year  on  its  bonded  or  other  indebt- 
edness to  an  amount  of  such  bonded  and  other  indebtedness  not  exceeding 
the  paid-up  capital  stock  of  such  corporation  outstanding  at  the  close  of 
the  year ;  in  the  case  of  banking  institutions,  also  all  interest  actually  paid 
within  the  year  on  deposits. 

4.  Taxes  paid  within  the  year  to  the  government  of  the  United  States, 
to  any  state  therein,  or  to  any  foreign  government,  as  a  condition  of  car- 
rying on  business  therein. 

5.  Dividends  received  on  the  stock  of  other  corporations,  subject  to  the 

tax 

4    From  the  amount  of  ascertained  net  income  the  sum  of  $5,000. 

With  regard  to  the  use  of  the  phrase  "gross  amount  of  income  re- 
ceived," Machen  remarks :  *  "  It  should  be  observed  that  the  tax  is  pro- 
portioned to  income  received  during  the  year.  This  word  would  seem  to 
exclude  income  to  which  the  company  may  be  entitled,  but  which  has  not 
been  collected.  Perhaps  it  would  be  too  broad  a  statement  that  the  Act 
*  Troatise  on  the  FedecBl  Corporation  Tax  Law  of  1909. 


Summary  of  the  Federal  Corporate  Tax  Law. 

contemplated  only  income  collected  in  cash;  but  at  any  rate,  it  does  seem 
to  distinguish  between  estimated  income  and  actual  receipts." 

Equally  significant  are  his  remarks  on  the  repeatedly  occurring  phrase 
"actually  paid":  "It  is  only  expenses  'actually  paid*  which  are  required 
to  be  deducted:  a  liability  which  has  been  incurred  but  not  discharged  is 
not  to  be  included.  This  is  no  serious  hardship,  because  the  deduc- 
tion could  in  that  case  be  made  the  next,  or  any  subsequent,  year;  for, 
as  already  stated,  the  deduction  is  not  confined  to  the  expense  incurred 
for  maintenance  and  operation  during  the  year  for  which  the  tax  is  levied. 
The  force  of  the  words  '  actually  paid  *  should  not  be  pressed  too  far.  It 
is  not  as  if  the  Act  had  said  *  actually  paid  in  cash,'  although  even  in  that 
case  a  set-off  by  mutual  agreement  of  an  existing  debt  owing  to  the  com- 
pany would  be  equivalent  to  payment.  As  it  is,  it  would  seem  that  accord- 
ing to  the  fair  meaning  of  the  words  used  they  are  equivalent  to  actually 
discharged  or  satisfied." 

The  discrepancy  between  the  requirements  of  the  law  and  sound  account- 
ing principles  is  evident  here  at  a  glance;  according  to  the  latter  an  ex- 
pense or  an  item  of  income  should  be  recorded,  not  when  actually  received 
or  paid,  but  when  incurred  or  accrued  in  a  certain  period,  otherwise  the 
year  gets  the  charge  or  credit  which  rightfully  belongs  elsewhere. 

IV.  Under  the  authority  of  this  Act  forms  of  return  have  been  pre- 
scribed, in  which  the  various  items  specified  in  the  law  are  stated;  blank 
forms  of  this  return  are  furnished  to  every  corporation,  not  exempted 
from  the  tax,  on  or  before  January  i,  and  each  corporation  must  make  an 
accurate  return,  under  the  affirmation  of  its  president  or  other  principal 
officer  and  its  treasurer,  to  the  Collector  of  Internal  Revenue,  on  or  be- 
fore March  i,  setting  forth  the  total  capital  stock  paid  up,  outstanding  at 
the  close  of  the  year,  the  gross  income  received  during  the  year  and  the 
items,  mentioned  under  III,  to  be  used  in  computing  the  net  income.  Fail- 
ure to  receive  the  blanks  or  any  notice  relative  thereto  does  not  excuse  a 
corporation  from  making  the  return  nor  relieve  it  from  penalties  for 
failure  to  do  so. 

In  order  to  simplify  the  work  of  making  the  returns,  every  class  of 
corporations,  mentioned  under  II,  receives  a  distinct  form  on  which  it 
must  file  its  report ;  the  forms  for  classes  3,  4  and  5  will  be  found  in  the 
Appendix,  pp.  409-414,  and  it  will  be  noticed  that  the  difference  is  mainly 
in  Note  A,  which  gives  the  definitions  of  gross  income  for  the  various 
kinds  of  corporations.  In  the  form  for  banks  and  other  financial  institu- 
tions, which  is  not  printed  there,  the  deductions  include  under  6  (b)  the 
following  provision:  Total  amount  of  interest  paid  within  the  year  on 
deposits.  The  form  for  transportation  companies  is  similar  to  Form 
No.  638. 

The  regulations  of  the  Act  do  not  call  for  specific  methods  of  keeping 
accounts  or  any  particular  system  of  bookkeeping;  the  requirement  is 
simply  that  the  transactions  be  so  recorded  that  accurate  returns  can  be 
made  therefrom  and  verified  when  necessary. 


« 


\ 


II 


394 


395 


f^ 


Accoumkmcy  ProUewm  md  Solutions, 

In  view  of  the  fact  tliat  the  language  used  by  the  lawmakers  in  framing 
the  Act  was  in  several  instances  not  entirely  clear,  decisions  have  been  ren- 
dered, from  time  to  time,  interpreting  the  meaning  of  the  provisions.  A 
synopsis  of  those  decisions  issued  hf  the  Internal  Revenue  Department 
follows. 

(T.  D.  1606.) 

Special  excise  tax. 

Synopsis  of  decisions  relating  to  the  tax  imposed  by  section  38,  act  of 

August  5,  19091  on  corporations,  etc, 

TiEASURY  Department, 
Officer  of  Commissioner  of  Internal  Revenue, 

Washington,  D.  C,  March  29.  1910. 
The  following  sjpnosis  of  decisions  made,  from  time  to  time,  on  ques- 
tions relating  to  the  special  excise  tax  imposed  by  section  38,  act  of  August 
5,  1909,  on  corporations,  joint  stock  companies,  associations,  and  insurance 
companies,  is  published  for  the  information  of  internal-revenue  officers 

and  others  concerned.  .    . 

EovAL  E.  Cabell,  Commissioner, 


CLASS  OF  CORPORATIONS^  ETC.,  SUBJECT  TO  TAXES. 

I.  The  tax  imposed  by  the  act  applies  to  all  corporations,  etc.,  described, 
except  those  speciically  exempted,  without  reference  to  the  kind  of  busi- 
ness carried  ©«• 

a.  Every  corporation,  etc.,  not  specifically  enumerated  as  exempt  shall 
make  the  return  required  by  law,  although  its  net  income  during  the  year 
may  not  have  exceeded  $5,000. 

3.  Corporations  claiming  special  exemption  should  nevertheles  make 
return  (in  blank  if  desired)  accompanied  by  a  statement  setting  forth  the 
ground  on  which  exemption  is  claimed. 

4.  Corporations,  etc.,  organized  during  the  year  or  going  into  liquida- 
tion during  the  year  should  nevertheless  render  a  sworn  return  on  the 
prescribed  form.  The  tax  imposed,  however,  is  held  not  to  apply  to 
corporations  which  went  out  of  existence  prior  to  the  passage  of  the  act. 

5.  Where  company  has  dissolved  and  the  required  return  is  not  made 
by  its  officers,  such  return  will  be  prepared  by  commissioner. 

6.  Where  corporation  has  gone  into  bankruptcy,  returns  in  such  cases 
to  be  made  by  trustee  in  bankruptcy. 

7.  Railroad  companies  operating  leased  or  purchased  lines  to  include  all 
receipts  derived  thereform,  and  if  bonded  indebtedness  has  been  assumed 
may  deduct  interest  thereon  to  an  amount  not  exceeding  its  own  paid-up 

396 


Summary  of  the  Federal  Corporate  Tax  Law. 

capital  stock.    If  such  subsidiary  companies  receive  income  in  the  way  of 
rentals,  etc.,  return  to  be  also  made  by  such  companies. 

8.  Corporations,  etc.,  organized  under  the  authority  of  the  United  States 
or  any  State  or  Territory  thereof,  or  Alaska  or  the  District  of  Columbia, 
to  include  in  their  returns  not  only  the  income  derived  from  the  business 
carried  on  within  the  confines  of  the  United  States,  but  income  received 
from  business  transacted  in  any  foreign  country  as  well. 

9.  Corporations  having  branch  or  subsidiary  companies  to  include  in 
their  returns  the  income  of  all  such  companies. 

10.  Foreign  companies  having  several  branch  offices  in  the  United 
States  should  each  designate  one  of  such  branches  as  its  principal  office 
and  should  also  designate  the  proper  officers  to  make  the  required  return. 

11.  Where  a  consolidation  of  two  or  more  corporations  has  been 
effected  during  the  year,  and  each  or  any  such  corporation  subsequent  to 
such  consolidation  collects  prior  existing  debts,  each  such  corporation 
should  make  separate  return  and  include  therein  all  such  collected  debts, 
as  also  all  income  received  during  the  year  prior  to  the  date  of  consol- 
idation. 

12.  "  Principal  place  of  business  "  is  held  to  mean  the  principal  office 
where  the  company  keeps  its  books  from  which  the  required  return  is  to 
be  prepared  and  not  the  place  where  the  operating  plant  is  located. 

13.  As  the  law  specifically  provides  that  the  tax  imposed  shall  be 
computed  on  the  net  income  during  each  calendar  year,  returns  of  income 
based  on  any  period  other  than  the  calendar  year  cannot  be  accepted. 

14.  Full  amount  of  stock,  as  represented  by  the  par  value  of  the  shares 
issued,  to  be  regarded  as  the  paid-up  capital  stock,  except  when  such  stock 
is  assessable  on  account  of  the  deferred  payments,  in  which  case  the 
amount  actually  paid  on  such  shares  will  constitute  the  actual  paid-up 
capital  stock  of  the  corporation. 

15.  Capital  stock  held  to  include  both  preferred  and  common  stock. 

16.  Surplus  and  undivided  profits  not  to  be  included  in  capital  stock 

17.  Holding  companies  known  as  "Voting  trusts,"  receiving  only 
dividends  on  stock  held,  and  having  no  capital  stock,  etc.,  not  liable. 

18.  Mutual  savings  banks  having  no  capital  stock  not  liable  to  tax  im- 
posed.    (Opin.  Atty.  Gen.,  Feb.  14,  1910.) 

19.  Co-operative  dairies  not  issuing  stock  and  allowing  patrons  divi- 
dends based  on  butter  fat  in  milk  furnished  not  liable. 

20.  Foreign  steamship  companies  having  no  office  in  the  United  States, 
whose  vessels  only  occasionally  touch  at  ports  in  the  United  States,  net 
regarded  as  doing  business  in  this  country  within  the  meaning  of  the 
statute. 

21.  Companies  organized  in  Porto  Rico  and  not  engaged  in  business  in 
the  United  States  not  subject  to  tax. 

22.  Corporations  owning  sugar  or  other  plantations  and  disposing  of 
the  products  thereof  not  entitled  to  exemption  as  agricultural  organizations. 

23.  Corporations  organized  to  sell  provisions,  etc.,  to  stockholders  and 
others  not  exempted. 

307 


Accountancy  PmMems  and  Solutions, 


Summary  of  the  Federal  Corporate  Tax  Law. 


t 


24  G>rporation5  organized  for  the  purpose  of  holding  real  estate,  to 
make  return  of  income  derived  from  the  property  so  held. 

25.  National  banks  do  not  come  within  any  of  the  exemptions  named 
in  the  act. 

26.  '*  Agricnltural  organizations  "  held  not  to  come  within  the  statutory 
exemption,  unless  their  chief  object  is  the  promotion  or  advancement  of 
agricnltural  interest,  and  no  part  of  the  net  income  inures  to  the  benefit 
of  their  stockholders. 

27.  Mutual  Hail  Association  regarded  as  an  insurance  company  and 
not  as  an  agricultural  association,  and  therefore  liable  to  tax. 

28.  Exemption  in  favor  of  fraternal  beneficiary  associations  does  not 
apply  to  mutual  fire  insurance  companies. 

a5>.  Limited  partnership,  if  organized  for  profit  and  having  a  capital 
stock  represented  by  shares,  although  no  **  certificates  of  stock  "  are  issued, 
are  liable  to  the  tax  imposed.    (Opin,  Atty.  Gen.,  Feb.  14,  1910.) 

30.  Building  and  loan  associations  not  exempt  if  having  a  capital  and 
loaning  to  others  than  members,  i.  e.,  if  doing  a  business  akin  to  banking 
business. 

31.  Building  and  loan  associations  issuing  stock  on  which  dividends 
are  guaranteed  held  to  be  liable  to  tax  imposed. 

32.  Interest  received  on  Government  bonds  to  be  included  in  gross  in- 
come.   (Opin.  Atty.  Gen.,  Jan.  13,  1910.) 

33.  Returns  should  be  signed  and  verified  by  two  of  the  officers 
designated  in  the  law.  Signing  of  one  person  holding  two  such  offices  not 
permitted.  Agents  for  foreign  steamship  companies  may  sign  the  required 
returns,  if  so  authorized  by  their  companies. 

34.  Returns  not  required  to  have  corporate  seal  affixed. 

35  Returns  filed  with  deputy  collector  regarded  as  having  been  filed 
with  collector. 

36.  No  form  of  protest  prescribed.  Any  form  of  protest  sufficient  if 
filed  before  payment  of  tax.    Right  of  protest  not  to  be  denied. 

INVlNTOllESj,  ACCOUNTS,  ETC. 

37,  Where  an  inventory  or  its  equivalent  was  not  taken  at  the  close  of 
the  year  1908,  a  supplemental  statement  showing  such  inventory  approxi- 
mately must  be  submitted  with  the  return  on  the  regular  form.  Such  sup- 
plemental statement  shall  be  verified  under  oath  by  the  treasurer  or  prin- 
cipal financial  officer  submitting  the  same.    (T.  D.  1578.) 

3a  Cost  of  manufactured  articles,  or  articles  in  process  of  manufacture, 
held  to  include  original  cost  of  material  used,  plus  cost  of  labor,  etc. 

39.  Mortgaged  real  estate  should  be  inventoried  at  its  full  value,  and 
amount  of  mortgage  reported  as  indebtedness. 

40.  Profits  realized  on  sale  of  real  estate  during  year,  also  increase  in 
value  of  unsold  property,  to  be  included  in  income. 

41.  Receipts  during  year  from  lands  sold  on  installment  to  be  included 
in  gross  income  for  that  year. 

30 


42.  Receipts  from  sale  of  patent  rights  to  be  included  in  income. 

43.  No  particular  system  of  bookkeeping  or  accounting  will  be  required 
by  the  department.  However,  the  business  transacted  by  corporations, 
etc.,  must  be  so  recorded  that  each  and  every  item  therein  set  forth  may  be 
readily  verified  by  an  examination  of  the  books  and  accounts  where  such 
examination  is  deemed  necessary. 

DEDUCTIONS,  EXPENSES,   ETC. 

44.  It  is  immaterial  whether  the  deductions  are  evidenced  by  actual 
disbursements  in  cash  or  whether  evidenced  in  such  other  way  as  to  be 
properly  acknowledged  by  the  corporate  officers  and  so  entered  on  the 
books  as  to  constitute  a  liability  against  the  assets  of  the  corporation,  etc., 
making  the  return. 

45.  Mortgage  indebtedness  on  real  estate,  if  assumed  by  the  corporation 
acquiring  such  real  estate,  to  be  included  in  the  indebtedness  of  the  corpora- 
tion. But  if  not  so  assumed  and  remains  only  as  a  lien  on  the  property, 
interest  paid  thereon  may  be  deducted  as  a  charge  "  made  as  a  condition 
to  the  continued  use  or  possession  of  the  property."  (Opin.  Atty.  Gen., 
Feb.  21,  1910.) 

46.  Cost  of  erecting  building,  if  included  in  lease  under  which  property 
is  held  by  company,  is  a  proper  deduction,  to  be  prorated  according  to 
time  fixed  by  lease. 

47.  General  expenses,  such  as  coal,  ship  stores,  etc.,  of  foreign  steamship 
companies,  to  be  prorated  as  provided  in  act  for  interest  deductions. 

48.  Amount  received  by  nursery  companies  from  sales  of  trees,  etc.,  less 
amount  expended  for  seedUngs  and  young  trees,  to  be  included  in  gross 
income.  Amount  expended  for  labor,  salesmen,  etc.,  to  be  deducted  as 
expenses. 

49.  Commissions  allowed  salesmen,  paid  in  stock,  may  be  deducted  as 
expense  if  so  charged  on  books. 

50.  Sales  of  stock  and  bonds  are  regarded  as  sales  of  capital  assets 
and  should  be  so  accounted  for.  (Art.  2,  regs.  31.)  But  proceeds  derived 
from  sale  of  bonds  used  in  defraying  ordinary  and  necessary  expenses  are 
a  proper  deduction  in  determining  the  company's  net  income. 

51.  Stock  issued  in  payment  of  property  purchased  represents  capital 
investments,  and  notes  issued  during  the  year  represent  indebtedness. 
Corporate  funds  applied  to  the  payment  of  outstanding  notes  not  a  proper 
deduction  in  ascertaining  net  income. 

52.  Amounts  expended  in  betterments  or  repairs  not  a  proper  deduction. 
A  resonable  allowance  for  depreciation  of  stock,  etc.,  is  permissible. 

53.  Betterments  and  repairs  not  proper  reductions  as  expenses,  the 
former  being  additions  to  the  capital  assets  of  the  company,  and  the  latter 
being  offset  by  allowance  for  depreciation. 

54-  Cost  of  replacing  old  rails,  structures,  etc.,  not  regarded  as  ordinary 
and  necessary  expenses.  Depreciation  during  year  will  be  allowed,  how- 
ever, in  such  cases. 

399 


fl 


Accoumiancy  Problems  and  Solutions, 

55-  Dividends  received  by  corporations  on  stock  of  other  corporations 
whose  net  income  does  not  exceed  $5,000  is  nevertheless  a  proper  deduction 
under  the  law.    (Opin.  Atty.  Gen.,  Jan.  24,  1910.) 

56.  Dividends  received  on  stock  of  foreign  corporations  not  subject  to 
tax  not  a  proper  deduction. 

57.  Dividends  paid  employees  in  lieu  of  wages  not  proper  deduction  as 
expenses. 

58.  Royalties  on  patent  rights  to  be  reported  as  income.  Allowance 
for  depreciation  of  patents  expiring  during  year,  however,  will  be  allowed. 

59.  Pensions  paid  or  gifts  made  to  employees  are  gratuities  and  not 
•'  ordinary  and  necessary  expenses." 

60.  Where  allowances  on  account  of  salaries  are  deemed  excessive  and 
for  the  purpose  of  evading  the  tax  due,  investigation  will  be  made,  and  if 
the  facts  warrant  prosecution  will  follow. 

61.  Interest  paid  on  time  deposits  and  deposits  subject  to  check  consti- 
tutes a  proper  deduction  from  the  amount  of  gross  income  during  the  year. 

62.  Interest  on  portions  of  bonded  or  other  indebtedness  bearing 
diHerent  rates  of  interest  may  be  deducted  from  gross  income  during  the 
year,  provided  the  aggregate  amount  of  such  indebtedness  does  not  exceed 
the  paid-up  capital  stock  of  the  corporation. 

6$.  Interest  paid  during  the  year  on  notes  given  prior  to  January  i, 
1909,  to  be  prorated.  But  interest  on  notes  given  in  1909,  and  payable 
subsequent  to  December,  1909,  unless  charged  on  the  company's  books, 
is  not  a  proper  deduction  from  the  income  of  that  year. 

64.  Interest  or  taxes  accruing  prior  to  the  year  for  which  return  is  made 
is  not  a  proper  deduction  from  the  gross  income  for  that  year. 

65.  Unearned  premiums  set  aside  by  insurance  companies  as  reserve  not 
to  be  included  as  income  until  earned. 

66.  Funds  set  aside  by  company  for  insuring  their  own  property  not  a 
proper  deduction. 

67.  As  the  tax  imposed  is  measured  by  and  is  not  a  tax  upon  the  net 
receipts  of  corporations,  etc.,  interest  received  during  the  year  on  Govern- 
ment bonds  is  not  a  proper  deduction  from  such  income  in  determining  the 
amount  of  tax  due.    (Opin.  Atty.  Gen.,  T.  D.  1583.) 

6a  State,  county,  or  municipal  taxes  paid  during  the  year  a  proper 
deduction  in  ascertaining  the  net  income  of  corporations. 

6g,  Import  duties  or  taxes  if  included  in  arriving  at  cost  of  goods  are 
not  deductible  under  the  head  of  taxes  paid  during  the  year. 

70.  Bad  debts,  if  so  charged  off  the  company's  books  during  the  year, 
are  proper  deductions.  But  such  debts,  if  subsequently  collected,  must 
be  treated  as  income. 

DEPRECIATION. 


Summary  of  the  Federal  Corporate  Tax  Law. 

72     Depreciation  in  value  of  mines  by  the  removal  of  ore,  if  not  other- 
wise' ascertainable,  may  be  prorated  as  in  the  case  of  sales  of  capital 

assets  'p  ' 

71  '  Depreciation  in  value  of  mines  by  the  removal  of  ore,  if  m  excess 

of  t  oer  cent,  of  investment,  to  be  explained  in  return  rendered. 

74.    Estimated  depreciation  in  oil  or  gas  wells,  buildings  machinery  etc, 

to  be  stated  in  detail,  if  exceeding  5  per  cent,  of  value  as  previously  m- 

""^/"corporations  leasing  mines  and  paying  royalties  on  ore  mined  not 
entitled  to  deduction  for  depreciation.  But  corporations  owning  mmes  arc 
entitled  to  allowance  for  depreciation  based  on  fair  estimate,  etc 

76  Removal  of  timber  from  timber  lands,  while  depleting  the  lands  to 
the  extent  of  such  removal,  is  regarded  as  a  change  in  the  form  of  assets 
and  not  a  depreciation  within  the  meaning  of  the  act.  ^     ^       , 

77.  Deduction  on  account  of  depreciation  of  property  must  be  based 
on  lifetime  of  property,  its  cost,  value,  and  use. 

7&  Voluntary  removal  of  buildings,  etc,  for  purpose  of  improvements 
not  regarded  as  loss  or  depreciation,  and  no  deduction  therefor  should  be 

"^^!*  Depreciation  of  company's  stock  a  loss  to  the  stockholders,  but  not 
a  loss  to  the  company  issuing  the  same,  and  therefore  not  a  proper  deduc- 

tion. 

(Signed)     Royal  E.  Cabell,  Commissioner. 


71.  Where  increase  or  decrease  during  the  year  in  the  value  of  real 
estate  acquired  in  previous  years,  sold  or  held  for  sale,  can  not  be  accurately 
determined,  such  increase  or  decrease  may  be  prorated,  as  provided  by 
regulations  in  cases  of  sale  of  capital  assets. 

400 


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Accountancy  Problems  and  Solutions. 

APPENDIX. 

FuD  Text  of  The  Coiporation  Tax  Act.    Section  38  <A 

/iJi'  /\ct  Of  Vtonsfcss 

'CJHUMSCl 

All  Act  to  pmride  fweiiuc,  eqiializft  diUks  and  oicourage  the  indiutriet  of 

llie  United  St«te%  and  for  other  puiposes. 

Approved  Aiifust  5,  1909. 

ARTICLE  FIRST. 

Imiiositioii  of  special  excise  tax  upon  domestic  and  foreign  corporations; 
nature,  amount  and  basis  of  tax;  classes  of  corporations  excepted 
from  operation  of  act. 

That  every  corporation,  joint  stock  company  or  association,  organized 
for  profit  and  having  a  capital  stock  represented  by  shares,  and  every  in- 
surance   company,    now    or   hereafter   organized  under  the  laws  of  the 
United  States  or  of  any  state  or  territory  of  the  United  States  or  un- 
der the  acts  of  Congress  applicable  to  Alaska  or  the  District  of  Colum- 
bia, or  now  or  hereafter  organized  under  the  laws  of  any  foreign  coun- 
try   and    engaged    in    business    in    any  state  or  territory  of  the  United 
States  or  in  Alaska  or  in  the  District  of  Columbia,  shall  be  subject  to 
pay  annually  a  special  excise  tax  with  respect  to  the  carrying  on  or  doing 
busmess  by  such  corporation,  joint  stock  company  or  association,  or  insur- 
ance company,  equivalent  to  one  per  centum  upon  the  entire  net  income 
over  and  above  five  thousand  dollars  received  by  it  from  all  sources  dur- 
ing such  year,  exclusive  of  amounts  received  by  it  as  dividends  upon  stock 
of  other  corporations,  joint  stock  companies  or  associations,  or  insurance 
companies,  subject  to  the  tax  hereby  imposed;  or  if  organized  under  the 
laws  of  any  foreign  country,  upon  the  amount  of  net  income  over  and 
above  five  thousand  dollars  received  by  it  from  business  transacted  and 
capital  invested  within  the  United  States  and  its  territories,  Alaska  and 
the  District  of  Columbia  during  such  year,  exclusive  of  amounts  so  re- 
ceived by  it  as  dividends  upon  stock  of  other  corporations,  joint  stock 
companies  or  associations,  or  insurance  companies,  subject  to  the  tax 
hereby  imposed : 

Provided,  however,  that  nothing  in  this  section  contained  shall  apply  to 
labor,  agricnltural  or  horticultural  organizations,  or  to  fraternal  beneficiary 
societies,  orders  or  associations  operating  under  the  lodge  system  and 
providing  for  the  payment  of  life,  sick,  accident  and  other  benefits  to  the 
members  of  such  societies,  orders,  or  associations,  and  dependents  of  such 
members,  nor  to  domestic  building  and  loan  associations,  organized  and 
operated  exclusively  for  the  mutual  benefit  of  their  members,  nor  to  any 

402 


Appendix. 

corporarion  or  association  organized  and  operated  «ccl»sively  fo/  «««- 
iou;  charitable  or  educational  purposes,  no  part  of  the  net  income  of 
whid.  inures  to  the  benefit  of  any  private  stockholder  or  mdmdual. 

ARTICLE   SECOaO. 
How  "net  income"  constituting  basis  of  assessment  shaU  be  ascertained 
and  computed. 

Such  net  income  shall  be  ascertained  by  deducting  from  the  gross 
amount  of  the  income  of  such  corporation,  joint  stock  company  or  associa- 
te, or  insurance  company,  received  within  the  year    rom  all  source^ 

First   all  the  ordinary  and  necessary  expenses  actually  paid  withm  the 
year  o^t  of  income  in  the  maintenance  and  operation  of  ^^s  business  and 
properties,  including  all  charges  such  as  rentals  or  franchise  pa»s 
required  to  be  made  as  a  condition  to  the  continued  use  or  possession  of 

^7e7o^,  all  losses  actually  sustained  within  the  year  and  not  compen- 
sated by  insurance  or  otherwise,  including  a  reasonable  allowance  for 
depreciation  of  property,  if  any,  and  in  the  case  of  insurance  companies 
the  sums  other  than  dividends,  paid  within  the  year  on  policy  and  annuity 
contracts  and  the  net  addition,  if  any,  required  by  law  to  be  made  withm 

the  year  to  reserve  funds.  .      t.     j  j         ^..u-,. 

Third  interest  actually  paid  within  the  year  on  its  bonded  or  other 
indebtedness  to  an  amount  of  such  bonded  and  other  indebtedness  not 
exceeding  the  paid-up  capital  stock  of  such  corporation,  joint  stock  com- 
pany or  association,  or  insurance  company,  outstanding  at  the  close  ot 
the  year,  and  in  the  case  of  a  bank,  banking  association  or  trust  company, 
all  interest  actually  paid  by  it  within  the  year  on  deposits. 

Fourth,  all  sums  paid  by  it  within  the  year  for  taxes  imposed  under 
the  authority  of  the  United  States  or  of  any  state  or  territory  thereof,  or 
imposed  by  the  government  of  any  foreign  country  as  a  condition  to 
carrying  on  business  therein. 

Fifth,  all  amounts  received  by  it  within  the  year  as  dividends  upon 
stock  of  other  corporations,  joint  stock  companies  or  associations,  or  in- 
surance companies,  subject  to  the  tax  hereby  imposed. 

Provided,  that  in  the  case  of  a  corporation,  joint  stock  company  or 
association,  or  insurance  company,  organized  under  the  laws  of  a  foreign 
country,  such  net  income  shall  be  ascertained  by  deducting  from  the 
gross  amount  of  its  income  received  within  the  year  from  business 
transacted  and  capital  invested  within  the  United  States  and  any  of  its 
territories.  Alaska,  and  the  District  of  Columbia. 

First,  all  the  ordinary  and  necessary  expenses  actually  paid  within  the 
year  out  of  earnings  in  the  maintenance  and  operation  of  its  business  and 
property  within  the  United  States  and  its  territories.  Alaska,  and  the 
District  of  Coliunbia.  including  all  charges  such  as  rentals  or  franchise  pay- 
ments required  to  be  made  as  a  condition  to  the  continued  use  or  pos- 
session of  property. 

403 


r 


Accomimey  Pmblems  and  Solutions, 

Second,  all  losses  aclually  sustained  within  the  year  in  business  con- 
ducted hj  it  within  the  United  States  or  its  territories,  Alaska,  or  the 
District  of  Columbia,  not  compensated  by  insurance  or  otherwise,  includ- 
ing a  reasonable  allowance  for  depreciation  of  property,  if  any,  and  in 
the  case  of  insurance  companies  the  sums  other  than  dividends,  paid 
within  the  year  on  policy  and  annuity  contracts  and  the  net  addition,  if 
any,  required  by  law  to  be  made  within  the  year  to  reserve  funds. 

Third,  interest  actually  paid  within  the  year  on  its  bonded  or  other  in- 
debtedness  to  an  amount  of  such  bonded  and  other  indebtedness  not 
exceeding  the  proportion  of  its  paid-up  capital  stock  outstanding  at  the 
close  of  the  year  which  the  gross  amount  of  its  income  for  the  year  from 
business  transacted  and  capital  invested  within  the  United  States  and  any 
of  its  territories,  Alaska,  and  the  District  of  Columbia  bears  to  the  gross 
amount  of  its  income  derived  from  all  sources  within  and  without  the 
United.  States. 

FoMrt/i,  the  sums  paid  by  it  within  the  year  for  taxes  imposed  under 
the  authority  of  the  United  States  or  of  any  state  or  territory  thereof. 

Fifth,  all  amounts  received  by  it  within  the  year  as  dividends  upon 
stock  of  other  corporations,  joint  stock  companies  or  associations  and 
insurance  companies,  subject  to  the  tax  hereby  imposed. 

In  the  case  of  assessment  insurance  companies  the  actual  deposit  of 
sums  with  state  or  territorial  officers,  pursuant  to  law,  as  additions  to 
guaranty  or  reserve  funds,  shall  he  treated  as  being  payments  required 
by  law  to  reserve  funds.  •' 

ARTICLE   THIRD. 

Bmltictioii  of  $5,000  from  amount  of  "net  income"  allowed;  returns  to 
be  made  to  collector  of  internal  revenue;  form  and  general  con- 
tents 'Of  return. 

There  shall  be  deducted  from  the  amount  of  the  net  income  of  each 
of  such  corporations,  joint  stock  companies,  or  associations,  or  insurance 
companies,  ascertained  as  provided  in  the  foregoing  paragraphs  of  this 
section,  the  sum  of  five  thousand  dollars,  and  said  tax  shall  be  computed 
upon  the  remainder  of  said  net  income  of  such  corporation,  joint  stock 
company  or  association,  or  insurance  company,  for  the  year  ending  Dc- 
cemlier  thirty-irst,  nineteen  hundred  and  nine,  and  for  each  calendar 
year  thereafter;  and  on  or  before  the  first  day  of  March,  nineteen  hun- 
llfed  and  ten,  and  the  first  day  of  March  in  each  year  thereafter,  a  true 
and  accurate  return  under  oath  or  affirmation  of  its  president,  vice-presi- 
dent, or  other  principal  officer,  and  its  treasurer  or  assistant  treasurer, 
aiall  be  made  by  each  of  the  corporations,  joint  stock  companies  or  asso- 
ciations, and  insurance  companies,  subject  to  the  tax  imposed  by  this  sec- 
tion, to  the  collector  of  internal  revenue  for  the  district  in  which  such 
corporation,  joint  stock  company  or  association,  or  insurance  company, 
has  its  principal  place  of  business,  or,  in  the  case  of  a  corporation,  joint 
stock  company  or  association,  or  insurance  company,  organized  under 

404 


Appendix. 

th.  laws  of  a  foreign  country,  in  the  place  -''-  Us  prit^dpM  busin^^^^ 
„„ied  on  within  the  United  States    .n  such  form-t,—^^^ 
o£  internal  revenue,  with  the  approval  of  the  secretary  01 

shall  prescribe,  setting  forth:  ,      ,        u « 

First  the  total  amount  of  the  paid-up  capital  stock  of  such  corpora- 
ti,iioint  stock  company  or  association,  or  insurance  company,  outsfand- 
ine  at  the  close  of  the  year. 

V«o«d  the  total  amount  of  the  bonded  and  other  indebtedness  of  such 
coSoratn  ioint  stock  company  or  association,  or  insurance  company, 
at  the  close  of  the  year. 

Third,  the  gross  amount  of  the  income  of  such  corporation  joint  s  ock 
compan;  or  association,  or  insurance  company,  received  during  such 
vefr  from  all  sources,  and  if  organized  under  the  laws  of  a  foreign  coun- 
trtheTross  amount  of  its  income  received  within  the  year  from  business 
t^sact^anrcapital  invested  within  the  United  States  and  any  of  its 
XerAlaska!  and  the  District  of  Columbia;  also  the  amount  re- 
ceded by  such  corporation,  joint  stock  company  or  associaUon  o,  t 
ance  company,  within  the  year  by  way  of  dividends  upon  stock  of  oOier 
corporations,  ioint  stock  companies  or  associations,  or  insurance  com- 
panies, subject  to  the  tax  imposed  by  this  section. 

Fourth  the  total  amount  of  all  the  ordinary  and  necessary  expenses 
actually  paid  out  of  earnings  in  the  maintenance  and  operation  of  the 
business  and  properties  of  such  corporation,  joint  stock  company  or  asso- 
ciation, or  insurance  company,  within  the  year,  stating  l^P^'^'fyf 
charges  such  as  rentals  or  franchise  payments  required  to  be  made  as  a 
condition  to  the  continued  use  or  possession  of  property,  and  it  or- 
ganized under  the  laws  of  a  foreign  country  the  amount  so  paid  in  the 
maintenance  and  operation  of  its  business  withm  the  United  States  and 
its  territories.  Alaska,  and  the  District  of  Columbia. 

Fifth  the  total  amount  of  all  losses  actually  sustained  during  the  year 
and  not  compensated  by  insurance  or  otherwise,  stating  separately  any 
amounts  allowed  for  depreciation  of  property,  and  in  the  case  of  insur- 
ance companies  the  sums  other  than  dividends,  paid  within  the  year  on 
policy  and  annuity  contracts  and  the  net  addition,  if  any,  required  by  law 
to  be  made  within  the  year  to  reserve  funds ;  and  in  the  case  of  a  cor- 
poration, joint  stock  company  or  association,  or  insurance  company,  or- 
ganized under  the  laws  of  a  foreign  country,  the  amount  so  paid  in  the 
by  it  during  the  year  in  business  conducted  by  it  within  the  United  States 
or  its  territories.  Alaska,  and  the  District  of  Columbia,  not  compensated 
by  insurance  or  otherwise,  stating  separately  any  amounts  allowed  for 
depreciation  of  property,  and  in  the  case  of  insurance  companies  the  sums 
other  than  dividends,  paid  within  the  year  on  policy  and  annuity  contracts 
and  the  net  addition,  if  any,  required  by  law  to  be  made  within  the  year 
to  reserve  fund. 

Sixth,  the  amount  of  interest  actually  paid  within   the    year    on    its 
bonded  or  other  indebtedness  to  an  amount  of  such  bonded  and  other  in- 

405 


(ffilf 


'W 


It  #1 


Accomntamy  Problems  and  Solutions, 

debtedness  not  ejcceedinir  the  nalH-ttft  ^.^.^i^.i    ^    •      i- 
;*»;„*    *    1  ^'-vviuig  mc  paia-up  capital  stock  of  such  cnrnor9fiVk«i 

Jtwiit  itodc  company  or  association  or  inLr^^  corporation, 

Hie  close  of  th^^lr   Jr  •     .1^     '        '"^"'^ance  company,  outstanding  at 
«  Close  of  the  year,  and  in  the  case  of  a  bank,  banking  association  or 

TLZir^'  ''"'*"^  ''''''''''''  ""  '^'^'-^^  paid  by  it  wiZ  tt  "  ar 
ZuTillLT  "  '"''  "'  '  corporation,  joint  stock  compandor  assail 
t^ilmT  "^^'^  ^^  ^-  ofT  foreign  cX 

.«L  tn^d  1^^^^        tl^  *"'  "'^^^  indebtedness  to  an  amount  of 

paid^p  ^f^^^^^^^  j:;sx  tr 

amount  of  its  income  for  the  year  frn^  w:„       .  .      ™  *'°''* 

invested  wHh;„  .i,.  tt  -.jo  ^  ^"  busmess  transacted  and  capital 
invested  within  the  United  States  and  any  of  its  territories  Al,.l-,  ,  J 
tt^Distnct  of  Columbia,  bears  to  the  gros's  amLr^  hs  ^^ome te'ri'd 
^f  ,»  T"'  "•*"  ""•'  ^*'^'  ««=  United  States.  ^ 

,1.       ?u    •      '  ^°°"*  P^'**  '•y  '«  *"Wn  the  year  for  taxes  imnoserf  „„H. 
the  authority  of  the  United  States  or  any  state  or  territorTSl^r  !^ 
separately  the  amount  <«  „,.M  i,     v  J  ■         ""^"tory  thereof,  and 

ofany  ford^^X  as  a  co^h'       '.""'''  '""^^  ''^  **  government 
E-  l.i     .       country  as  a  condition  to  carryinir  on  bnsine<:«  th»r.;« 
£««*/*,  the  net  income  of  such  comorifinn    L°?    . '""       '"ere'"- 

-.,__i,.: .  ^  "'  """*  corporation,  joint  stock  comoanv  nr 

association,  or  msurance  company,  after  making  the  H«I.L;T^  .u° 
section  authorized.  maKing  the  deductions  m  this 

ij)^'  ^"«=''/^""s  shall  as  received  be  transmitted  forthwith  bv  the  cal 
lector  to  the  commissioner  of  internal  revenue.         °™'*"''  ^  *'  ~'- 

ASTICLE  FODBTH. 

Powers  of  commtesioner  of  fatenial  revenue  in  cases  where  Inr™,--^ 

return  or  no  return  ••  n..^..  .      .         "-■»»  wnere  ucorrect 

n  or  no  return  u  made;   examination  of  books  and  accounts. 

te-^r^rS  ^'Ihe^^I.^orof'Th"'^  the  commissioner  of  in- 
belief  that  the  retard  Z^X^Zcol^Lr"Zrri  '"*^"  *^' 
association,  or  ins„ra«.  comp'any.^^rrrS'orlerverryTuer 
tor  shaU  report  to  the  commissioner  of  intenUl  re^^'tLr^ 
poration,  joint  stock  company  or  assodation  ^  inZ,"  ^  ~'" 

fniUA  fr»  *«-iir«  -      ^  «t»!jociaiion,  or  insurance  comoanv   has 

tailed  to  make  a  return  as  required  by  law,  the  commissioner  of  i„t™i 
revenue  may  require  from  th,.  i^r^J.*:        •  '!''/^*^™";»ssioner  of  internal 

ciation,  or  iLurrce  coZ"v  -^^^         '^^^  '''™''^"^  °'  ''''" 

tion  with  refere^e  toT^^^^  ««ch  return,  such  further  informa- 

tiiiiitcuLc  TO  Its  capital,  income,  losses,  and  exfiptirffftir^^  «»  u 
may  deem  expedient;  and  the  commissioner  of  nte^al  r^eZ  f-  .h 
purpose  of  ascertaining  the  correctness  of  such  return  or  lor  th!'  ll. 

fZ  "!^=''y,  =*«»«•»*<»  revenue  agent  specially  designaiedZ  hf"  f„^ 

^S  or  at.lntfot'  '"  *'"^  "*"™  "'  ^^^  -^P-«^.  5"^"^ 
i.oiiipmy  or  association,  or  insurance  company  and  tn  ri>n,i;r«  *u  «**  / 
ance  of  anv  officer  nr  -«,,.i^  i-     '■"*"t'*"J^'  ^"a  to  require  the  attend- 

«cc  oi  any  omcer  or  employee  of  such  corporation,  ioint  storlr  rnrr.^n^» 
or  association,  or  insurance  company,  and  to  tl^  hrte.^^^^^^ 
reference  to  the  matter  required  by  L  t  t  ^nt^  1:^^^:^^ 

406 


Appendix. 

with  DOwer  to  administer  oaths  to  such  person  or  persons ;  and  the  com- 
Tssioner  of  internal  revenue  may  also  invoke  the  aid  of  any  court  of  the 
United  States  having  jurisdiction  to  require  the  attendance  of  such  offi- 
cers or  employees  and  the  production  of  such  books  and  papers.  Upon 
thT  information  so  acquired  the  commissioner  of  internal  revenue  may 
^end  any  return  or  make  a  return  where  none  has  been  made.  All  pro- 
!Sdings  taken  by  the  commissioner  of  internal  revenue  under  the  pro- 
visionf  of  this  section  shall  be  subject  to  the  approval  of  the  secretary  of 
the  treasury. 

ARTICLE   FIFTH. 

Assessment   of   tax;    penalties  by   way   of   additions  to   tax  for  false 
returns   and   in    cases  of   neglect   to   make   returns;    assessments 
payable  annually  on  or  before  June  30;   penalties  for  non-payment. 
All  returns  shall  be  retained  by  the  commissioner  of  internal  revenue 
who  shall  make  assessments  thereon ;  and  in  case  of  any  return  made  with 
false  or  fraudulent  intent,  he  shall  add  one  hundred  per  centum  of  sudi 
tax  and  in  case  of  a  refusal  or  neglect  to  make  a  return  or  to  verify  the 
same  as  aforesaid  he  shall  add  fifty  per  centum  of  such  tax.    In  case  of 
neglect  occasioned  by  the  sickness  or  absence  of  an  officer  of  such  cor- 
poration, joint  stock  company  or  association,  or  insurance  ^^^mpany,  re- 
quired to  make  said  return,  or  for  other  sufficient  reason,  the  collector 
may  allow  such  further  time  for  making  and  delivering  such  return  as 
he  may  deem  necessary,  not  exceeding  thirty  days.    The  amount  so  added 
to  the  tax  shall  be  collected  at  the  same  time  and  in  the  same  manner  as 
the  tax  originally  assessed,  unless  the  refusal,  neglect  or  falsity  is  ais- 
covered  after  the  date  for  payment  of  said  taxes,  in  which  case  the  amount 
so  added  shall  be  paid  by  the  delinquent  corporation,  joint  stock  company 
or  association,  or  insurance  company,  immediately  upon  notice  given  by 

the  collector.  •  •  4.    *    1, 

All  assessments  shall  be  made  and  the  several  corporations,  joint  stocK 
companies  or  associations,  or  insurance  companies,  shall  be  notified  of 
the  amount  for  which  they  are  respectively  liable  on  or  before  the  first 
day  of  June  of  each  successive  year,  and  said  assessments  shall  be  paid 
on  or  before  the  thirtieth  day  of  June,  except  in  cases  of  refusal  or  neglect 
to  make  such  return,  and  in  cases  of  false  or  fraudulent  returns,  in  which 
cases    the    commissioner    of    internal  revenue  shall,  upon  the  discovery 
thereof,  at  any  time  within  three  years  after  said  return  is  due,  make  a 
return  upon  information  obtained  as  above  provided  for,  and  the  assess- 
ment made  by  the  commissioner  of  internal   revenue  thereon  shall  be 
paid  by  such  corporation,  joint  stock  company  or  association,  or  insur- 
ance company,  immediately  upon  notification  of  the  amount  of  such  assess- 
ment ;  and  to  any  sum  or  sums  due  and  unpaid  after  the  thirtieth  day  of 
June  in  any  year,  and  for  ten  days  after  notice  and  demand  thereof  by 
the  collector,  there  shall  be  added  the  sum  of  five  per  centum  on  the 
amount  of  tax  unpaid  and  interest  at  the  rate  of  one  per  centum  per 
month  upon  said  tax  from  the  time  the  same  becomes  due. 

407 


1^ 


Acc&uniamy  Pmbiems  and  S&luHom, 

ARTICLE  SIXTH. 
All  rettims  to  lie  ikd  by  collectors  in  office  of  conimissioner  of  internal 
revenue. 
When  the  assessment  shall  be  made,  as  provided  in  this  section,  the  re- 
turns, together  with  any  corrections  thereof  which  may  have  been  made 
by  the  commissioner,  shall  be  filed  in  the  office  of  the  commissioner  of 
internal  revenue  and  shall  constitute  public  records  and  be  open  to  in- 
spection as  such. 

ARTICLE   SEVENTH. 

Unlawful  for  officials  to  divulge  information. 

It  shal  be  unlawful  for  any  collector,  deputy  collector,  agent,  clerk  or 
other  officer  or  employee  of  the  United  States  to  divulge  or  make  known, 
in  any  manner  whatever  not  provided  by  law,  to  any  person  any  informa- 
tion obtained  by  him  in  the  discharge  of  his  official  duty,  or  to  divulge 
or  make  known  in  any  manner  not  provided  by  law  any  document  re- 
ceived, evidence  taken,  or  report  made  under  this  section,  except  upon  the 
special  direction  of  the  president;  and  any  offense  against  the  foregoing 
provision  shall  be  a  misdemeanor  and  be  punished  by  a  fine  not  exceed- 
ing one  thousand  dollars,  or  by  imprisonment  not  exceeding  one  year, 
or  both,  at  the  discretion  of  the  court. 

ARTICLE   EIGHTH. 

Pumltiet  Inifosed  upon  corporations,  joint  stock  companies  and  associa- 
tions for  refusal  or  neglect  to  make  returns  and  for  false  or  fraudulent 
returns. 

If  any  of  the  corporations,  joint  stock  companies  or  associations,  or 
insurance  companies,  aforesaid,  shall  refuse  or  neglect  to  make  a  return 
at  the  time  or  times  hereinbefore  specified  in  each  year,  or  shall  render 
a  false  or  fraudulent  return,  such  corporation,  joint  stock  company  or 
association,  or  insurance  company,  shall  be  liable  to  a  penalty  of  not  less 
than  one  thousand  dollars  and  not  exceeding  ten  thousand  dollars. 

Any  person  authorized  by  law  to  make,  render,  sign,  or  verify  any  re- 
turn, who  makes  any  false  or  fraudulent  return,  or  statement,  with  intent 
to  defeat  or  evade  the  assessment  required  by  this  section  to  be  made, 
shall  be  guilty  of  a  misdemeanor,  and  shall  be  fined  not  exceeding  one 
thousand  dollars  or  be  imprisoned  not  exceeding  one  year,  or  both,  at 
the  discretion  of  the  court,  with  the  costs  of  prosecution. 

All  laws  relating  to  the  collection,  remission,  and  refund  of  internal 
revenue  taxes,  so  far  as  applicable  to  and  not  inconsistent  with  the  pro- 
visions of  this  section,  are  hereby  extended  and  made  applicable  to  the 
tax  imposed  by  this  section. 

Jurisdiction  is  hereby  conferred  upon  the  circuit  and  district  courts 
of  the  United  States  for  the  district  within  which  any  person  summoned 
under  this  section  to  appear  to  testify  or  to  produce  books,  as  aforesaid, 
shall  reside,  to  compel  such  attendance,  production  of  books,  and  testi- 
mony by  appropriate  process. 


Appendix. 


Form    Wo.     637.— FORM    TO     BE     FILED     BY     MAKUFACTURHIG 

CORPORATIONS. 

This  form,  properly  Med  out  and  executed,  must  be  in  the  hands  of 

the  collector  of  internal  revenue  for  the  district  in  which  is  located  the 

principal    office    of    the    corporation  making    the    return    on    or   before 
March  i. 

TO   BE  FILLED  IN   BY  TO  BE   FILLED   IN  BY    INTERNAL  REVENUE 

COLLECTORS.  BUREAU. 

List  No Assessment  List 19 

Class Page Line 

District    of Date    received 19 

UNITED    STATES    INTERNAL   REVENUE. 

RETURN  OF  ANNUAL  NET  INCOME. 
(Section  38,  Act  of  Congress,  Approved  August  5,  1909.) 

MANUFACTURING    CORPOR^VTIONS, 

Return  of  Net  Income  received  during  the  year  ending  December  31, 

19 ^  by   a  corporation,  the  principal 

place  of  business  of  which  is  located  at in  the 

State  of 

1.  Total  amount  of  paid-up  stock  outstanding  at  close  of 

year    $ • 

2.  Total  amount  of  bonded  or  other   indebtedness  out- 

standing at  close  of  year $ 

3.  Gross   Income    (see   Note   A) $. 

DEDUCTIONS. 

4.  Total  amount  of  all  the  ordinary  and  neces- 

sary expenses  of  maintenance  and 
operation  of  the  business  and  proper- 
ties of  the  corporation  (see  Note  B) .     $ 

5.  (a)  Total    amount    of    losses    sus- 

tained January  i  to  Decem- 
ber 31    $ 

(b)  Total    amount    of    depreciation 

January  i  to  December  31. .     $ ' 

Total  (see  Note  B) $ 

6.  Total  amount  of  interest  January  i 

to  December  31  on  bonded 
or  other  indebtedness  to  an 
amount  not  to  exceed 
amount  of  paid-up  capital 
at      close      of      year      (see 

7.  (a)  Total  taxes  paid  January  i  to 

December    31    imposed    un- 


M 


409 


1 


Accountancy  Problems  and  Solutions. 

der  authority  of  the  United 
States  or  any  state  or  ter- 
ritory  thereof $ 

(h)  Foreign  taxes  paid $ 

Total  (see  Note  B) $ 

8.  Amount  received  by  way  of  dividends  upon 

stock  of  other  corporations,  joint 
stock  companies,  associations  and 
insurance   companies   subject   to  this 

IaJC     •■•..........*. Jp 

Total  Deductions   

9.  Net  Income   

10.  Specific  deduction  from  net  income  allowed  by  law . . . 

11.  Amount  on  which  tax  at  one  per  centum  is  to  be  cal- 


I 

$ 

$5,000.00 


State  or. ,  G>unty  or To  wit : 

........ ,  President,  and Treasurer,  of 

the  corporation,  whose  return  of  annual 

net  income  is  set  forth  above,  being  severally  duly  sworn,  each  for  him- 
self, deposes  and  says  that  the  foregoing  report  and  the  several  items 
therein  set  forth  are,  to  his  best  knowledge  and  belief  and  from  such  in- 
formation as  he  has  been  able  to  obtain,  true  and  correct  in  each  and 
every  particular ;  that  the  amount  of  gross  income  therein  set  forth  is  the 
full  amount  of  gross  income,  without  any  deduction  whatsoever,  received 
from  all  sources  by  the  said  corporation  during  the  year  stated,  and  that 
the  net  income  therein  set  forth  is  the  full  amount  on  which  the  tax  is 
proper  to  be  assessed. 
SwoEN  AND  Subscribed  to  before  me  this 

President. 

Treasurer. 

[Seal]. 

•mmimimmimmmiiimKmmm.^' Miiiiiii ■ ■ «■■ ■ ■ ■■iiimiii ■■ ■ ■ ,„, ■ ■ ■■ ■ ■.iiii. — ni— n-i. ■ .i. ,.111. .iii.ii.i.ii..i..iiii.i, ,.  ,         1. .m.^. _.,  ,  „. 

Note  A. — The  gross  income  received  during  the  year  from  all  sources  shall  in  the 
case  of  a  manufacturing  corporation  consist  of  the  total  amount  ascertained  through 
an  accounting  that  shows  the  difference  between  the  price  received  for  the  goods  as 
m»M  and  the  cost  of  such  goods  as  manufactured.  The  cost  of  goods  inaufactured 
■liall  be  ascertained  by  an  addition  of  a  charge  to  the  account  of  the  cost  of  goods 
as  manufactured  during  the  year,  of  the  sum  of  the  inventory  at  beginning  of  the 
year  and  a  credit  to  the  account  of  the  sum  of  the  inventory  at  the  end  of  the  year. 
To  this  amount  should  be  added  all  items  of  income  received  during  the  year  from  other 
sources,  including  dividends  received  on  stock  of  other  corporations,  joint-stock  com- 
panies and  associations  subject  to  this  tax.  In  the  determination  of  the  cost  of  goods 
manufactured  and  sold  as  above,  such  cost  shall  comprehend  all  charges  for  maintenance 
and  operation  of  manufacturing  plant,  but  shall  not  embrace  allowances  for  depreciation 
or  losses,  which  items  shall  be  taken  account  of  under  the  proper  heading  above  as  a 
deduction. 

Mote  B. — The  deductions  authorized  shall  include  all  expense  items  under  the 
various  heads  acknowledged  as  liabilities  by  the  corporation  making  the  return  and 
entered  as  such  on  its  book  from  January  i  to  December  31  of  the  year  for  which 
return  is  made. 


Appendix. 

Worm     Ho.     638.— FORM     TO     BE     FILED     BY     MISCELLANEOUS 

CORPORATIONS. 

This  form,  properly  filled  out  and  executed,  must  he  in  the  hands  of  the 
collector  of  internal  revenue  for  the  district  in  which  is  located  the  prin- 
cipal office  of  the  corporation  making  the  return  on  or  before  March  i. 


I 


\ 


TO  BE  FILLED  IN  BY 
COLLECTORS. 


List  No. 
Qass... 


.District  of. 


TO  BE  FILLED  IN  BY  INTERNAL  REVENUE 
BUREAU. 

Assessment  List 19 

Page Line 

Date  received   19 


UNITED    STATES   INTERNAL  REVENUE. 

RETURN  OF  ANNUAL  NET  INCOME. 
(Section  38,  Act  of  Congress,  Approved  August  5,  1909.) 

MISCELLANEOUS   CORPORATIONS. 

Return  of  Net  Income  received  during  the  year  ending  December  31, 

ig ^  by  ^  corporation,  the  principal 

place  of  business  of  which  is  located  at in  the 

State  of 

1.  Total  amount  of  paid-up  stock  outstanding  at  close  of 

year  $ 

2.  Total  amount  of  bonded  or  other  indebtedness  out- 

standing at  close  of  year $ 

3.  Gross   Income    (see  Note  A) $ 

DEDUCTIONS. 

4.  Total  amount  of  all  the  ordinary  and  neces- 

sary expenses  of  maintenance  and 
operation  of  the  business  and  proper- 
ties of  the  corporation  (see  Note  B) .     $ 

5.  (a)  Total    amount    of    losses    sus- 

tained January  i  to  Decem- 
ber 31    $ 

(b)  Total   amount   of    depreciation 

January  i  to  December  31. .     $ 

Total  (see  Note  B) $ 

6.  Total  amount  of  interest  January  i 

to  December  31  on  bonded 
or  other  indebtedness  to  an 
amount  not  to  exceed 
amount  of  paid-up  capital 
at  close  of  year  (see 
Note  B) $ 


410 


411 


Accountancv  Problems  and  Sohitions. 


7.  (a)  Total  taxes  paid  January  i  to 

December  31  imposed  un- 
der authority  of  the  United 
States  or  any  state  or  ter- 
ritory   thereof    $ _ 

(b)  Foreign   taxes   paid $ 

Total  (see  Note  B) $. 

8.  Amount  received  by  way  of  dividends  upon 

stock  of  other  corporations,  joint 
stock  companies,  associations  and 
insurance    companies    subject    to   this 

tax    $. 

Total  Deductions   


$. 


9.    Net  Income    $ 

10.     Specific  deduction  from  net  income  allowed  by  law...     $5,000.00 


II.    Amount  on  which  tax  at  one  per  centum  is  to  be  cal- 
culated         $. 


State  of ,  County  of To  wit : 

•  • ,   President,   and Treasurer,   of 

the corporation,  whose  return  of  annual 

net  income  is  set  forth  above,  being  severally  duly  sworn,  each  for  him- 
self, deposes  and  says  that  the  foregoing  report  and  the  several  items 
therein  set  forth  are  to  his  best  knowledge  and  belief,  and  from  such  in- 
formation as  he  has  been  able  to  obtain,  true  and  correct  in  each  and 
every  particular ;  that  the  amount  of  gross  income  therein  set  forth  is  the 
full  amount  of  gross  income  without  any  deduction  whatsoever  received 
from  all  sources  by  the  said  corporation  during  the  year  stated,  and  that 
the  net  income  therein  set  forth  is  the  full  amount  on  which  the  tax  is 
proper  to  be  assessed. 


Sworn  and  Subscribed  to  before  me  this. 

01 ,  *9*  •  -  • 


.  President. 
Treasurer. 


[Seal], 


Note  A. — Gross  income  shall  consist  of  the  total  of  the  gross  revenue  derived 
from  the  operation  and  management  of  its  business  and  properties,  together  with  all 
amounts  of  income  from  other  sources,  including  dividends  on  stock  of  other  organiza- 
tions subject  to  this  special  excise  tax  received,  as  shown  by  entries  upon  its  books 
from  January  i  to  December  31  of  the  year  for  which  return  is  made. 

Note  B. — The  deductions  authorized  shall  include  all  expense  items  under  the 
various  heads  acknowedged  as  liabilities  by  the  corporation  making  the  return  and 
entered  as  such  on  its  books  from  January  i  to  December  31  of  the  year  for  which 
return  is  made. 

412 


Appendix. 


Form      No. 


639.__FORM      TO      BE      FILED 
CORPORATIONS. 


BY      MERCANTILE 


This  form,  properly  filled  out  and  executed,  must  be  in  the  hands  of  the 
collector  of  internal  revenue  for  the  district  in  which  is  located  the  prin- 
cipal office  of  the  corporation  making  the  return  on  or  before  March  i. 
to  be  filled  in  by  to  be  filled  in  by  internal  revenue 

collectors.  bureau. 

List  No Assessment  List 19 

Class Page Line 

District  of Date  received   i9--- 

UNITED    STATES   INTERNAL   REVENUE. 

RETURN  OF  ANNUAL  NET   INCOME. 
(Section  38,  Act  of  Congress,  Approved  August  5,  1909) 

MERCANTILE    CORPORATIONS. 

(Corporations  whose  principal  business  is  buying  and  selling.) 
Return  of  Net  Income  received  during  the  year  ending  December  31, 

jQ  w   a  corporation,  the  principal 

place  of  business  of  which  is  located  at m  the 

State  of 

1.  Total  amount  of  paid-up  stock  outstanding  at  close  of 

year   $ 

2.  Total  amount  of  bonded  or  other   indebtedness  out- 

standing at   close  of  year $ 

3.  Gross   Income    (sec    Note   A) $ 

deductions. 

4.  Total  amount  of  all  the  ordinary  and  neces- 

sary expenses  of  maintenance  and 
operation  of  the  business  and  proper- 
ties of  the  corporation  (see  Note  B)  .     $ 

5.  (a)  Total    amount    of    losses    sus- 

tained January  i  to  Decem- 
ber 31    $ 

(b)  Total    amount    of    depreciation 

January  i  to  December  31 . .     $ 

Total   (see  Note  B) '. $ 

6.  Total  amount  of  interest  January  i 

to  December  31  on  bonded 
or  other  indebtedness  to  an 
amount  not  to  exceed 
amount  of  paid-up  capital 
at  close  of  year  (see 
Note   B)    $ 

7.  (a)  Total  taxes  paid  January   i  to 

December  31  imposed  un- 
der authority  of  the  United 


'"I 


413 


Accountancy  Problems  and  Solutions. 


States  or  any  state  or  ter- 
ritory  thereof    $ 

(b)  Foreign  taxes  paid $ 

Total  (see  Note  B) $. 

8.  Amount  received  by  way  of  dividends  upon 
stock  of  other  corporations,  joint 
stock  companies,  associations  and 
insurance   companies   subject   to  this 

tax $. 

Total  Deductions   


Appendix. 


9. 

ICk 


Net  Income   

Specific  deduction  from  net  income  allowed  by  law. 


$ 

$5,000.00 


II.    Amount  on  which  tax  at  one  per  centum  is  to  be  cal- 
culated for  assessment $. 


State  of ,  G)unty  of To  wit : 

,   President,  and Treasurer,   of 

the corporation,  whose  return  of  annual 

net  income  is  set  forth  above,  being  severally  duly  sworn,  each  for  him- 
self, deposes  and  says  that  the  foregoing  report  and  the  several  items 
therein  set  forth  are  to  his  best  knowledge  and  belief,  and  from  such  in- 
formation as  he  has  been  able  to  obtain,  true  and  correct  in  each  and 
every  particular;  that  the  amount  of  gross  income  therein  set  forth  is 
the  full  amount  of  gross  income  without  any  deduction  whatsoever,  re- 
ceived from  all  sources  by  the  said  corporation  during  the  year  stated, 
and  that  the  net  income  therein  set  forth  is  the  full  amount  on  which  the 
tax  is  proper  to  be  assessed. 

Sworn  and  Subscribed  to  before  me  this 

day  of ,19 


President. 


[Seal]. 


Treasurer. 


Note  A. — The  gross  amount  of  income  received  during  the  year  from  all  source* 
shall  in  the  case  of  a  mercantile  corporation  consist  of  the  total  amount  ascertained 
through  inventory,  or  its  equivalent,  which  shows  the  difference  between  the  price 
received  for  goods  sold  and  the  cost  of  goods  purchased  during  the  year,  with  an 
addition  of  a  charge  to  the  account  of  the  sum  of  the  inventory  at  beginning  of  the 
year  and  a  credit  to  the  account  of  the  sum  of  the  inventory  at  the  end  of  the  year. 
To  this  amount  should  be  added  all  items  of  income  received  during  the  year  from 
©ther  sources,  including  dividends  received  on  stock  of  other  corporations,  joint-stock 
companies  and  associations  subject  to  this  tax.  In  determining  this  amount  no  account 
■UI  be  taken  of  allowances  for  depreciation  or  losses,  which  items  shall  be  taken 
•eeount  of  under  the  proper  heading  above  as  a  deduction. 

Note  B. — The  deductions  authorized  shall  include  all  expense  items  under  the 
various  heads  acknowledged  as  liabilities  by  the  corporation  making  the  return  and 
entered  as  such  on  its  books  from  January  i  to  December  31  of  the  year  for  which 
return  is  made. 

414 


Supreme  Court  of  the  United  States. 


Nos.  407,  409,  410,  411.  412,  415,  420,  425.  431,  432,  442,  443.  446.  456  and 

457.— October  Term,  1910. 


Stella  P.  Flint,  as  General  Guardian  ' 
of    the    property    of    Samuel    N. 


Appeal    from    the    Circuit    Court 


Stone    Junior,  a  minor,  Apellant,    |       of   the   United    States    for   the 
y        '  ^j.  District  of  Vermont. 

Stone   Tracy  Company   et  al.        J 


J 


Wyckoff  Van   Derhoeff,  Appellant,  | 

409  vs. 
The    Coney    Island    and    Brooklyn 

Railroad   Company  et  al. 

Francis  L.  Hine,  Appellant, 

410  vs. 

Home  Life  Insurance  Company  etal. 

Fred  W.   Smith,  Appellant, 

411  vs. 

The  Northern  Trust  Company,  A.  C. 
Bartlett,  William  A.  Fuller  et  al. 

William  H.   Miner,   Appellant, 

412  vs. 

The  Corn  Exchange  National  Bank 
of  Chicago,  Charles  H.  Wacker, 
Martin  A.  Ryerson  et  al. 

Cedar  Street  Company,  Appellant, 

415  ^^• 

Park  Realty  Company. 

Lewis  W.  Jared,  Appellant, 
420  vs. 

The  American  Multigraph  Company 
et  al. 

Joseph  E.  Gay,  Appellant, 
425  vs. 

The  Baltic  Mining  Company  et  al. 


Appeals  from  the  Circuit  Court 
of  the  United  States  for  the 
Southern  District  of  New 
York. 


Appeals  from  the  Circuit  Court 
of  the  United  States  for  the 
Northern  District  of  Illinois. 


I 


Appeal  from  the  Circuit  Court 
of  the  United  States  for  the 
Southern  District  of  New 
York. 

Appeal  from  the  Circuit  Court 
of  the  United  States  for  the 
Northern  District  of  Ohio. 

Appeal  from  the  Circuit  Court 
of  the  United  States  for  the 
District  of  Massachusetts. 


41S 


i#» 


4ccountaiuy  Problems  and  Solutions. 


if 


\ 


Percy  H.  Brimdage,,  Appellant, 
431  vs. 

Broadway  Realty  Cornpaoy  et.  al. 

Paul   Ixcroix,   Appellant, 

432  FA 

Motor  Taximeter  Cab  Company  et  al. 

Arthur   Lyman   and    Arthur   T.   Ly-  ^ 
man,   as    Trustees   under   the   last 

will  and  testament  of  George  Baty 
Blake,  deceased,  Appellants, 
442  vs. 

Interborough  Rapid  Transit  Com- 
pany et  al. 


George    Wendell    Phillips,   Appellant 

443  vs. 

Fifty  Associates  et  al. 

Oscar  Mitchell,  Appellant, 

446  vs. 

Clark  Iron  Company. 

William  H.  Fluhrer,  Albert  W.  Du-  ' 
rand    and    Howard    H.    Williams, 
Appellants,  [ . 

45^  vs. 

New  York  Life  Insurance  Company. 

Katlierine  Cary  Cook,  Harriet  Hunt-  ] 
iegton    Cook,    and    Ellenor   Rich- 
ardson   Cook,    by    Anna    H.    R. 
Cook,     their    guardian    and    next  I 

friend.  Appellants, 

457  vs. 

Boston  Wharf  Company  et  al. 


Appeals  from  the  Circuit  Court 
of  the  United  States  for  the 
Southern  District  of  New 
York. 


Appeal  from  the  Circuit  Court 
of  the  United  States  for  the 
District  of  Massachusetts. 

Appeal  from  the  Circuit  Court 
of  the  United  States  for  the 
District  of  Minnesota. 

Appeal  from  the  Circuit  Court 
of  the  United  States  for  the 
Southern  District  of  New 
York. 


Appeal  from  the  Circuit  Court 
of  the  United  States  for  the 
District  of  Massachusetts. 


[March  13,  191 1.| 

Mr.  Justice  Day  delivered  the  opinion  of  the  Court. 

These  cases  involve  the  constitutional  validity  of  Section  38  of  the  Act 
of  Congress  approved  August  5,  1909,  known  as  "  The  Corporation  Tax  " 
law.    (Stat.  1909,  pp.  11-112-117.) 

It  is  contended  in  the  first  place  that  this  section  of  the  act  is  unconsti- 
tutional, because  it  is  a  revenue  measure,  and  originated  in  the  Senate  in 
violation  of  Section  7  of  Article  i  of  the  Constitution,  providing  that  "  all 
bills  for  the  raising  of  revenue  shall  originate  in  the  House  of  Represen- 

416 


Appcndi.r. 

tatives  but  the  Senate  may  propose  or  concur  with  amendments  as  on 
other  bills."  The  history  of  the  act  is  contained  in  the  Government's  brief, 
and  is  accepted  as  correct,  no  objection  being  made  to  its  accuracy. 

This  statement  shows  that  the  tariff  bill,  of  which  the  section  under 
consideration  is  a  part,  originated  in  the  House  of  Representatives  and 
was  there  a  general  bill  for  the  collection  of  revenue.     As  origmally  in- 
troduced  it  contained  a  plan  of  inheritance  taxation.     In  the  Senate  the 
proposed    tax    was    removed    from  the  bill,  and  the  corportion  tax,  ma 
measure    substituted  therefor.    The  bill  having  properly  origmated  in  the 
House   we  perceive  no  reason  in  the  constitutional  provision  relied  upon 
whv  it  may  not  be  amended  in  the  Senate  in  the  manner  which  it  was 
in  this  case     The  amendment  was  germane  to  the  subject-matter  of  the 
bill  and  not  beyond  the  power  of  the  Senate  to  propose.    In  thus  deciding 
we  do  not  wish  to  be  regarded  as  holding  that  the  journals  of  the  House 
and  Senate  may  be  examined  to  invalidate  an  act  which  has  been  passed 
and  signed  by  the  presiding  officers  of  the  House  and  Senate  and  approved 
by  the  President  and  duly  deposited  with  the  State  Department.     (Field 
vs.  Clark,  143  U.  S.  649;  Harwood  vs.  Wentworth,  162  U.  S.  547;  Twin 
City  Bank  vs.  Nebeker,  167  U.  S.  196.)  ,   ,  . 

In  order  to  have  in  mind  some  of  the  more  salient  features  of  the  statute 
with  a  view  to  its  interpretation,  a  part  of  the  first  paragraph  is  here  set 
out,  as  follows: 

"  Sec.  38.     That  every  corporation,  joint  stock  company  or  association 
organized  for  profit  and  having  a  capital  stock  represented  by  shares,  and 
every  insurance  company  now  or  hereafter  organized  under  the  laws  of 
the  United  States  or  of  any  state  or  territory  of  the  United  States,  or 
under  the  acts  of  Congress  applicable  to  Alaska  or  the  District  of  Colum- 
bia, or  now  or  hereafter  organized  under  the  laws  of  any  foreign  country 
and  engaged  in  business  in  any  state  or  territory  of  the  United  States 
or  in  Alaska  or  in  the  District  of  Columbia,  shall  be  subject  to  pay  an- 
nually a  special  excise  tax  with  respect  to  the  carrying  on  or  doing  busi- 
ness by  such  corporation,  joint  stock  company  or  association  or  insurance 
company  equivalent  to  one  per  centum  upon  the  entire  net  income  over 
and  above  five  thousand  dollars  received  by  it  from  all   sources  during 
such  year,  exclusive  of  amounts  received  by  it  as  dividends  upon  stock  of 
other   corporations,   joint   stock  companies   or   associations   or   insurance 
companies  subject  to  the  tax  hereby  imposed;  or  if  organized  under  the 
laws  of  any  foreign  country,  upon  the  amount  of  net  income  over  and 
above  five  thousand  dollars  received  by  it  from  business  transacted  and 
capital  invested  within  the  United  States  and  its  territories,  Alaska  and 
the  District  of  Columbia,  during  such  year,  exclusive  of  amounts  so  re- 
ceived by  it  as  dividends  upon  stock  of  other  corporations,  joint  stock 
companies  or  associations    or    insurance    companies    subject    to   the    tax 
hereby  imposed." 

A  reading  of  this  portion  of  the  statute  shows  the  purpose  and  design 
of  Congress  in  its  enactment  and  the  subject-matter  of  its  operation.  It  is 
at  once  apparent  that  its  terms  embrace  corporations  and  joint  stock  com- 

417 


Accountancy  Problems  and  Solutions. 

panics  or  associations  whicb  are  organized  for  profit,  and  have  a  capital 
stock  represented  by  shares.  Such  joint  stock  companies,  while  differ- 
ing somewhat  from  corporations,  have  many  of  their  attributes  and  enjoy 
many  of  their  privileges.  To  these  are  added  insurance  companies,  and 
they,  as  corporations,  joint  stock  companies  or  associations,  must  be  such 
as  are  now  or  hereafter  organized  under  the  laws  of  the  United  States 
or  of  any  state  or  territory  of  the  United  States,  or  under  the  acts  of 
Congress  applicable  to  Alaska  and  the  District  of  Columbia.  Each  and 
all  of  these,  the  statute  declares,  shall  be  subject  to  pay  annually  a  spe- 
cial excise  tax  with  respect  to  the  carrying  on  and  doing  business  by  such 
corporation,  joint  stock  company  or  association,  or  insurance  company. 
The  tax  is  to  be  equivalent  to  one  per  cent  of  the  entire  net  income  over 
and  above  $5,000  received  by  such  corporation  or  company  from  all 
smtrces  during  the  year,  excluding,  however,  amounts  received  by  them 
as  dividends  upon  stock  of  other  corporations,  joint  stock  companies  or 
associations,  or  insurance  companies,  subject  to  the  tax  imposed  by  the 
statute.  Similar  companies  organized  under  the  laws  of  any  foreign  coun- 
try and  engaged  in  business  in  any  state  or  territory  of  the  United 
States,  or  in  Alaska  or  the  District  of  Columbia,  are  required  to  pay  the 
tax  upon  the  net  income  over  and  above  $5,000  received  by  them  from 
business  transacted  and  capital  invested  within  the  United  States,  the 
territories,  Alaska  and  the  District  of  Columbia,  during  each  year,  with 
the  like  exclusion  as  to  amounts  received  by  them  as  dividends  upon  stock 
of  other  corporations,  joint  stock  companies  or  associations,  or  insurance 
companies,  subject  to  the  tax  imposed. 

While  the  mere  declaration  contained  in  a  statute  that  it  shall  be  re- 
garded as  a  tax  of  a  particular  character  does  not  make  it  such  if  it  is 
apparent  that  it  cannot  be  so  designated  consistently  with  the  meaning  and 
effect  of  the  act,  nevertheless  the  declaration  of  the  lawmaking  power  is  en- 
titled to  much  weightt  9n4  in  this  statute  the  intention  is  expressly  declared 
to  impose  a  special  excise  tax  with  respect  to  the  carrying  on  or  doing 
business  by  such  corporation,  joint  stock  company  or  association,  or  insur- 
ance company.  It  is  therefore  apparent,  giving  all  the  words  of  the  statute 
effect,  that  the  tax  is  imposed  not  upon  the  franchises  of  the  corporation 
irrespective  of  their  use  in  business,  nor  upon  the  property  of  the  corpora- 
tion, but  upon  the  doing  of  corporate  or  insurance  business  and  with  re- 
spect to  the  carrying  on  thereof,  in  a  sum  equivalent  to  one  per  centum 
upon  the  entire  net  income  over  and  above  $5,000  received  from  all  sources 
during  the  year;  that  is,  when  imposed  in  this  manner  it  is  a  tax  upon 
the  doing  of  business  with  the  advantages  which  inhere  in  the  peculiarities 
of  corporate  or  joint  stock  organization  of  the  character  described.  As 
the  latter  organizations  share  many  benefits  of  corporate  organization  it 
may  be  described  generally  as  a  tax  upon  the  doing  of  business  in  a  cor- 
porate capacity.  In  the  case  of  the  insurance  companies  the  tax  is  im- 
posed upon  the  transaction  of  such  business  by  companies  organized  under 
the  laws  of  the  United  States  or  any  state  or  territory,  as  heretofore 
stated. 

418 


Appendix. 

This  tax  it  is  expressly  stated,  is  to  be  equivalent  to  one  per  centum  of 
the  entire  'net  income  over  and  above  $5,000  received  from  all  sources 
durine  the  year-this  is  the  measure  of  the  tax  explicitly  adopted  by  the 
statute     The  income  is  not  limited  to  such  as  is  received  from  property 
used  in  the  business,  strictly  speaking,  but  is  expressly  declared  to  be 
uoon  the  entire  net  income  above  $5,000  from  all  sources,  exdudmg  the 
amounts  received  as  dividends  on  stock  in  other  corporations,  joint  stock 
companies  or  associations,  or  insurance  companies,  also  subject  to  the  tax. 
In  other  words,  the  tax  is  imposed  upon  the  doing  of  business  of  the  char- 
acter described,  and  the  measure  of  the  tax  is  to  be  the  income,  with  the 
deduction  stated,  received  not  only  from  property  used  in  business,  but 
from  every  source.    This  view  of  the  measure  of  the  tax  is  strengthened 
when  we  note  that  as  to  organizations  under  the  laws  of  foreign  coun- 
tries the  amount  of  net  income  over  and  above  $5,000  i«^  "*i.^^  ^^^^  ;^- 
ceived  from  business  transacted  and  capital  invested  m  the  United  States, 
the  territories,  Alaska  and  the  District  of  Columbia. 

It  is  further  strengthened  when  the  subsequent  sections  are  considered 
as  to  deductions  in  ascertaining  net  income  and  requiring  returns  from 
those  subject  to  the  act.    Under  the  second  paragraph  the  net  income  is  to 
be  ascertained  by  certain  deductions  from  the  gross  amount  of  mcome 
received  within  the  year  "  from  all  sources  " ;  and  the  return  to  be  made 
to  the  collector  of  internal  revenue  under  the  third  section  is  required  to 
show  the  gross  amount  of  the  income  received  during  the  year  "  from  all 
sources."    The  evident  purpose  is  to  secure  a  return  of  the  entire  income, 
with  certain  allowances  and  deductions  which  do  not  suggest  a  restriction 
to  income  derived  from  property  actively  engaged  in  the  business.    This 
interpretation  of  the  act,  as  resting  upon  the  doing  of  business,  is  sus- 
tained by  the  reasoning  in  Spreckels  Sugar  Refining  Co.  vs.  McClam,  192 
U.  S.  397,  in  which  a  special  tax  measured  by  the  gross  receipts  of  the 
business  of  refining  oil  and  sugar  was  sustained  as  an  excise  in  respect  to 
the  carrying  on  or  doing  of  such  business. 

Having  thus  interpreted  the  statute  in  conformity,  as  we  believe,  with 
the  intention  of  Congress  in  passing  it,  we  proceed  to  consider  whether, 
as  thus  construed,  the  statute  is  constitutional. 

It  is  contended  that  it  is  not,  certainly  so  far  as  the  tax  is  measured 
by  the  income  of  bonds  non-taxable  under  Federal  statutes,  and  municipal 
and  State  bonds  beyond  the  Federal  power  of  taxation.  And  so  of  real 
and  personal  estates,  because  as  to  such  estates  the  tax  is  direct,  and  re- 
quired to  be  apportioned  according  to  population  among  the  States.  It 
is  insisted  that  such  must  be  the  holding  unless  this  court  is  prepared  to 
reverse  the  income  tax  cases  decided  under  the  act  of  1894.  (Pollock  vs. 
Farmers'  Loan  &  Trust  Company,  157  U.  S.  429;  s.  c,  158  U.  S.  601.) 

The  applicable  provisions  of  the  Constitution  of  the  United  States  in 
this  connection  are  found  in  article  one,  section  eight,  clause  one,  and  in 
article  one,  section  two,  clause  three,  and  article  one,  section  nme,  clause 
four.    They  are  respectively: 

419 


Accouniancy  Problems  and  Solutions. 

**  The  Coogress  shall  have  power  to  lay  and  collect  taxes,  duties,  im- 
posts, and  excises,  to  pay  the  debts  and  provide  for  the  common  defense 
and  general  welfare  of  the  United  States ;  but  all  duties,  imposts  and  ex- 
cises shall  be  uniform  throughout  the  United  States." 

**  Representatives  and  direct  taxes  shall  be  apportioned  among  the  sev- 
eral States  which  may  be  included  within  this  Union,  according  to  their 
respective  numbers." 

"  No  capitation  or  other  direct  tax  shall  be  laid  unless  in  proportion  to 
the  census  or  enumeration  hereinbefore  directed  to  be  taken." 

It  was  under  the  latter  requirement  as  to  apportionment  of  direct  taxes 
according  to  population  that  this  court  in  the  Pollock  case  held  the  statute 
of  1894  to  be  unconstitutional    Upon  the  rehearing  of  the  case  Mr.  Chief 

Justice  Fuller,  who  spoke  for  the  court,  summarising  the  effect  of  the 

decision,  said: 

"We  have  considered  the  act  only  in  respect  of  the  tax  on  income  de- 
rived from  real  estate,  and  from  invested  personal  property,  and  have  not 
commented  on  so  much  of  it  as  bears  on  gains  or  profits  from  business, 

privileges,  or  employments,  in  view  of  the  instances  in  which  taxation  on 

business,  privileges,  or  employments,  has  assumed  the  guise  of  an  excise 

tax  and  been  sustained  as  such."'    (1,58  U.  S.  635.) 

And  as  to  the  excise  taxes,  the  Chief  Justice  said : 

"We  do  not  mean  to  say  that  an  act  laying  by  apportionment  a  direct 
tax  on  all  real  estate  or  personal  property,  or  the  income  thereof,  might 
not  also  lay  excise  taxes  on  business,  privileges,  employments  and  voca- 
tions."    (p.  637.) 

The  Pollock  case  was  before  this  court  in  Knowhon  vs.  Moore,  178 
U.  S.  41.  In  that  case  this  court  sustained  an  excise  tax  upon  the  trans- 
mission of  property  by  inheritance.  It  was  contended  there,  as  here,  that 
the  case  was  ruled  by  the  Pollock  case,  and  of  that  case  this  court,  speak- 
ing by  the  present  Chief  Justice,  said: 

"  The  issue  presented  in  the  Pollock  case  was  whether  an  income  tax 
was  direct  within  the  meaning  of  the  Constitution.  The  contentions 
which  the  case  involved  were  thus  presented.  On  the  one  hand,  it  was 
argued  that  only  capitation  taxes  and  taxes  on  land  as  such  were  direct, 
within  the  meaning  of  the  Constitution,  considered  as  a  matter  of  first 
impression,  and  that  previous  adjudications  had  construed  the  Constitu- 
tion as  having  that  import.  On  the  other  hand,  it  was  asserted  that,  in 
principle,  direct  taxes,  in  the  constitutional  sense,  embraced  not  only  taxes 
on  land  and  capitation  taxes,  but  all  burdens  laid  on  real  or  personal 
property  because  of  its  ownership,  which  were  equivalent  to  a  direct  tax 
on  such  property,  and  it  was  affirmed  that  the  previous  adjudications  of 
this  court  had  settled  nothing  to  the  contrary. 

**  Undoubtedly,  in  the  course  of  the  opinion  in  the  Pollock  case  it  was 

said  that  if  a  tax  was  direct  within  the  constitutional  sense  the  mere 


Appendix. 

erroneous  qualifictaion  of  it  as  an  excise  or  duty  would  not  take  it  out  of 
the  constitutional  requirement  as  to  apportionment.  But  th.s  langv^ge 
related  to  the  subject-matter  under  consideration,  and  was  but  a  state- 
Lint  thlt  a  tax  which  was  in  itself  direct,  because  imposed  upon  properiy 
ment  tnat  a  lax  wii  v,  rhaneed  bv  affixmg  to  it  the 

solely  because  of  .Isou^nerslup,  <=»"  <i  "°'  ''^^^  j^jecide  that  a  tax 
cualifications  of  exc.se  or  duty.    Here  we  are^sked  to  ^^^ 

is  a  direct  tax  on  property  which  has  at  all  times  oeen  coub  

Intlhesifof  such  a  tax ;  that  is.  that  it  has  ever  been  treated  as  a  duly  o, 
:xS  becauL  of  the  particular  occasion  which  gives  nse  to  its  Jevy. 

^  ^  ilp  ^ 

"  Considering  that  the  constitutional  rule  of  apportionment  had  its 
orig^  in  te  purpose  to  prevent  taxes  on  persons  .0/./,  because  J  ,^^ 
uugiu  i  f  t^rnbt^rtv  from  beine;  levied  by  any  other  rule  tnan 

general  otmcrsJnp  'f  P'^J'^^^^^^  ^^-^.^  ^y  the  court:    First,  that 

that  of  apportionment,  two  things  were  oeciaea  oy 

no  sound  distinction  existed  between  a  tax  levied  on  a  person  solely  be 
no  ''^^""/^ J'^'""^       nwnershio  of  real  property,  and  the  same  tax  imposed 
XtclLrof tsT^^^^  of  personal  property.    Secondly, 

it  the    ax  on  the  income  derived  from  such  property,  real  or  personal 
was  t  Lgal  equivalent  of  a  direct  tax  on  ^^e  Property  from  w^^^^^^^^ 
income  was  derived,  and  hence  must  be  apportioned.    Th^^«/7^*"J^"^^ 
however,  lend  no  support  to  the  contemion  that  it  was  decided  that  du- 
fe   imposts  and  excises,  which  are  not  the  essential  equivalents  of  a  tax 
of  pZerty  generally,  real  or  personal,  solely  ^--- .-V^haHTouM 
must  be  converted  into  direct  taxes,  because  it  is  conceived  ^^^J^^^^^^^ 
be  demonstrated  by  a  close  analysis  that  they  could  not  be  shifted  from 

the  person  upon  whom  they  first  fall."  ...  *  ^->.«  ol 

The  same  view  was  taken  of  the  Pollock  case  m  the  subsequent  case  of 
Spreckels  Sugar  Refining  Co.  vs.  McClain,  192  U.  S.  397- 

The  act  now  under  consideration  does  not  impose  direct  taxation  upon 
property  solely  because  of  its  ownership,  but  the  tax  is  withm  the  class 
which  Congress  is  authorized  to  lay  and  collect  under  article  one,  section 
eight,  clause  one  of  the  Constitution,  and  described  generally  as  taxes,  du- 
ties, imposts  and  excises,  upon  which  the  limitation  is  that  they  shall  be 
uniform  throughout  the  United  States. 

Within  the  category  of  indirect  taxation,  as  we  shall  have  further  occa- 
sion to  show,  is  embraced  a  tax  upon  business  done  in  a  corporate  ca- 
pacity, which  is  the  subject-matter  of  the  tax  imposed  in  the  act  under 
consideration.  The  Pollock  case  construed  the  tax  there  levied  as  direct, 
because  it  was  imposed  upon  property  simply  because  of  its  ownership. 
In  the  present  case  the  tax  is  not  payable  unless  there  be  a  carrying  on  or 
doing  of  business  in  the  designated  capacity,  and  this  is  made  the  occa- 
sion for  the  tax,  measured  by  the  standard  prescribed.  The  difference 
between  the  acts  is  not  merely  nominal,  but  rests  upon  substantial  differ- 
ences between  the  mere  ownership  of  property  and  the  actual  doing  of 
business  in  a  certain  way. 

It  is  unnecessary  to  enter  upon  an  extended  consideration  of  the  tech- 
nical meaning  of  the  term  "  excise."     It  has  been  the  subject-matter  of 

421 


^m 


^    y 


k 


Accountancy  Probieims  ami  Solutions, 

considerable  discussion— the  terms  duties,  imposts  and  excises  are  gen- 
erally treated  as  embracing  the  indirect  forms  of  taxation  contemplated 
by  the  Constitution.    As  Mr.  Chief  Justice  Fuller  said  in  the  Pollock  case, 

smpra: 

"Although  there  have  been  from  time  to  time  intimations  that  there 
might  be  some  tax  which  was  not  a  direct  tax  nor  included  under  the 
words  'duties,  imposts  and  excises,'  such  a  tax  for  more  than  one  hun- 
dred years  of  national  existence  has  as  yet  remained  undiscovered,  not- 
withstanding the  stress  of  particular  circumstances  has  invited  thorough 
investigation  into  sources  of  revenue." 

And  in  the  same  connection  the  Chief  Justice,  delivering  the  opinion  of 
the  court  in  Thomas  w.  United  States,  192  U.  S.  363,  in  speaking  of  the 

words  duties,  imposts  and  excises,  said: 

"  We  think  that  they  were  used  comprehensively  to  cover  customs  and 
excise  duties  imposed  on  importation,  consumption,  manufacture  and  sale 
of  certain  commodities,  privileges,  particular  business  transactions,  voca- 
tions, occupations  and  the  like." 

Duties  and  imposts  are  terms  commonly  applied  to  levies  made  by  gov- 
ernments on  the  importation  or  exportation  of  commodities.  Excises  arc 
"taxes  laid  upon  the  manufacture,  sale  or  consumption  of  commodities 
within  the  country,  upon  license  to  pursue  certain  occupations  and  upon 
corporate  privileges."     (Cooley  Cons.  Lim.  7th  ed.  680.) 

The  tax  under  consideration,  as  we  have  construed  the  statute,  may  be 
described  as  an  excise  upon  the  particular  privilege  of  doing  business  in 
a  corporate  capacit>%  1.  e.,  with  the  advantages  which  arise  from  corpo- 
rate or  quasi-corporate  organization;  or,  when  applied  to  insurance  com- 
panies, for  doing  the  business  of  such  companies.  As  was  said  in  the 
Thomas  case,  192  U.  S.  supra,  the  requirement  to  pay  such  taxes  involves 
the  exercise  of  privileges,  and  the  element  of  absolute  and  unavoidable 
demand  is  lacking.  If  business  is  not  done  in  the  manner  described  in 
the  statute,  no  tax  is  payable. 

If  we  are  correct  in  holding  that  this  is  an  excise  tax,  there  is  nothing 
in  the  Constitution  requiring  such  taxes  to  be  apportioned  according  to 
population.  ( Pacific  Ins.  Co.  vs.  Soule,  7  Wall.  433 ;  Springer  vs.  United 
States,  102  U.  S.  586;  Spreckels  Sugar  Refining  Co.,  192  U.  S.  397.) 

It  is  next  contended  that  the  attempted  taxation  is  void  because  it 
levies  a  tax  upon  the  exclusive  right  of  a  state  to  grant  corporate  fran- 
chises, because  it  taxes  franchises  which  are  the  creation  of  the  state 
in  its  sovereign  right  and  authority.  This  proposition  is  rested  upon  the 
implied  limitation  upon  the  powers  of  national  and  state  governments  to 
take  action  which  encroaches  upon  or  cripples  the  exercise  of  the  exclusive 
power  of  sovereignty  in  the  other.  It  has  been  held  in  a  number  of  cases 
that  the  state  cannot  tax  franchises  created  by  the  United  States  or  the 
agencies  or  corporations  which  arc  created  for  the  purpose  of  carrying 
out  governmental  functions  of  the  United  States.    (McCulloch  vs.  Mary- 


422 


Appendix. 

land,  4  Wheat.  316;  Osborn  ...  Bank.  9  Wheay38 ;  ^'^°^' ^Y^; ^^- 
i^tnn  iR  Wall  5;  California  vs.  Central  Pac.  R.  R.  Co.,  127  ^-  ^-  i-J 
T"  xamination  of  these  cases  will  show  that  in  e-h  case  where  Ae 
taxtas  held  invalid  the  decision  rested  upon  the  proposition  *"*  ««=  ~^- 
^raTion  was  created  to  carry  into  effect  powers  conferred  upon  the  Fed- 
crr^vrrrLent  in  its  sovereign  capacity,  and  the  attempted  taxation 
21  an  interference  with  the  effectual  exercise  of  such  powers. 

In  Osborn  vs.  The  Bank,  s.pra.  a  leading  case  upon  the  ^""j^**. -J^'_^» 
it  was  heW  that  the  bank  of  the  United  States  was  not  a  pnvate  corpora^ 
tionlut  a  public  one.  created  for  national  purposes,  and  therefore  beyond 
SietaxLg  power  of  the  state.  Chief  Justice  Marshall,  m  deUvermg  the 
5n  on  o?  the  court,  conceded  that  if  the  corporation  had  been  ongma^d 
?  r/Lna<rement  of  an  individual  concern,  with  private  trade  and 
i"rofif for~rt  1  and  principal  object,  it  might  be  taxed  by  the  sUte. 
Said  the  Chief  Justice : 

"If  these  premises  [that  the  corporation  was  one  of  private  *"»cterl 
were  true,  the  conclusion  drawn  from  them  would  •'^;"'=?;f ^^^    Th,^ 
mere  priv;te  corporation,  engaged  in  its  own  '^^''"^'^J'^^^^'^Zy^^' 
would  certainly  be  subject  to  the  taxing  power  of  the  state.  =^  =^y  »"' 
vidual  would  be;  and  the  casual  circumstance  »£  its  beng  ™Pl°y^  ^^ 
the  government  in  the  transaction  of  its  fiscal  affairs  «<>»ld  "O  more  ex 
empf  its  private  business  from  the  operation  of  that  power  than  it  would 
«empt   L   private   business   of   any  individual  employed  m  the  same 
manner." 

The  inquiry  in  this  connection  is:  How  far  do  the  implied  limitations 
upon  the'tax'ng  power  of  the  United  States  over  objects  whjch  wouM 
otherwise  be  legitimate  subjects  of  federal  taxation  withdraw  themjrom 
the  reach  of  the  federal  government  in  raismg  revenue  because  they  are 
oursued  under  franchises  which  are  the  creation  of  the  states? 

In  approaching  this  subject  we  must  remember  that  enactments  levying 
taxes   as  other  laws  of  the  federal  government  when  actmg  within  con- 
stitutional authority,  are  the  supreme  law  of  the  land.    The  Constitution 
contains  only  two  limitations  on  the  right    of   Congress   to   levy   excise 
taxes-  they  must  be  levied  for  the  public  welfare  and  are  required  to  be 
uniform  throughout  the  United  States.    As  Mr.  Chief  Justice  Oiase  said, 
speaking  for  the  court  in  License  Tax  Cases,  5  Wall.  462,  471 :  '  Congress 
cannot  tax  exports,  and  it  must  impose  direct  taxes  by  the  rule  of  appor- 
tionment and  indirect  taxes  by  the  rate  of  uniformity.    Thus  hmited  and 
thus  only,  it  reaches  every  subject  and  may  be  exercised  at  discretion. 
The  limitations  to  which  the  Chief  Justice  refers  were  the  only  ones  im- 
posed in  the  Constitution  upon  the  taxing  power. 

In  McCray  vs.  United  States,  195  U.  S.  27,  this  court  sustained  a  tea- 
cral  tax  on  oleomargarine,  artificially  colored,  and  held  that  while  the 
Fifth  and  Tenth  Amendments  qualify,  so  far  as  applicable,  all  the  pro- 
visions of  the  ConstiUition,  nothing  in  those  amendments  operates  to  take 
away  the  power  to  tax  conferred  by  the  Constitution  on  the  Congress.    In 

423 


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Jccouniancy  Problems  and  Solutions, 

that  case  it  was  contended  that  the  snbject  taxed  was  within  the  exclusive 
domain  of  the  States,  and  that  the  real  purpose  of  Congress  was  not  to 
raise  revenue,  but  to  tax  out  of  existence  a  substance  not  harmful  of  itself 
and  one  which  might  be  lawfully  manufactured  and  sold;  but,  the  only 
constitutional  limitation  which  this  court  conceded,  in  addition  to  the  re- 
quirement of  uniformity,  and  that  for  the  sake  of  argument  only  so  far  as 
concerned  the  case  then  under  consideration,  was  that  Congress  is  re- 
strained from  arbitrary  impositions  or  from  exceeding  its  powers  in  seek- 
ing to  effect  unwarranted  ends.  The  limitation  of  uniformity  was  deemed 
sufficient  by  those  who  framed  and  adopted  the  Constitution.  The  courts 
may  not  add  others.  (Patton  vs.  Brady.  184  U.  S,  608,  622.  And  see 
United  States  vs.  Singer,  15  Wail,  iii,  121;  Nicol  vs.  Ames,  173,  U.  S, 
5«>9.  515-) 

We  must  therefore  enter  upon  the  inquiry  as  to  implit-d  limitations  upon 
the  exercise  of  the  federal  authority  to  tax  because  of  the  sovereignty  of 
the  states  over  matters  within  their  exclusive  jurisdiction,  having  in  view 
the  nature  and  extent  of  the  power  speciiically  conferred  upon  Congress 
by  the  Constitution  of  the  United  States.  We  must  remember,  too,  that 
the  revenues  of  the  United  States  must  be  obtained  in  the  same  territory. 
from  the  same  people,  and  excise  taxes  must  be  collected  from  the  same 
activities,  as  are  also  reached  by  the  states  in  order  to  support  their  local 
governments. 

While  the  tax  in  this  case,  as  we  have  construed  the  statute,  is  imposed 
upon  the  exercise  of  the  privilege  of  doing  business  in  a  corporate  ca- 
pacity, as  such  business  is  done  under  authority  of  state  franchises,  it 
becomes  necessary  to  consider  in  this  connection  the  right  of  the  federal 
government  to  tax  the  activities  of  private  corporations  which  arise  from 
the  exercise  of  franchises  granted  by  the  state  in  creating  and  conferring 
powers  upon  such  corporations.  We  think  it  is  the  result  of  the  cases  here- 
tofore decided  in  this  court  that  such  business  activities,  though  exercised 
because  of  state-created  franchises,  are  not  beyond  the  taxing  power  of 
the  United  States.  Taxes  upon  rights  exercised  under  grants  of  state 
franchises  were  sustained  by  this  court  in  Railroad  Company  vs.  Collector, 
100  U.  S.  595 ;  United  States  w.  Erie  R,  R.  Co.,  106  U.  S.  $27;  Spreckels 
Sugar  Refining  Co..  vs.  McClain,  192  U.  S.  sg^. 

It  is  true  that  in  those  cases  the  question  does  not  seem  to  have  been 

directly  made,  but.  in  sustaining  such  taxation,  the  right  of  the  federal 
government  to  reach  such  agencies  was  necessarily  involved.  The  ques- 
tion was  raised  and  decided  in  the  case  of  Veazic  Bank  w,  Fenno,  8  Wall 
533.  In  that  well-known  case  a  tax  upon  the  notes  of  a  state  bank  issued 
for  circulation  was  sustained.  Mr.  Chief  Justice  Chase,  in  the  course  of 
the  opinion,  said: 

"  Is  it.  then,  a  tax  on  a  franchise  granted  by  a  state,  which  Congress, 
upon  any  principle  exempting  the  reserved  powers  of  the  states  from  im- 
pairment by  taxation,  must  be  held  to  have  no  authority  to  lay  and  col- 

icct  r 

mtLmSmm 


Appendix. 

"  We  do  not  say  that  there  may  not  be  such  a  tax.    It  may  be  admit- 
ted that  the  reserved  rights  of  the  states,  such  as  the  right  to  pass  laws, 
to    «ve    effect    to    laws    through  executive  action,  to  administer  justice 
through  the  courts,  and  to  employ  all  necessary  agencies  for  legitimate 
TZTes    of    state    govermnent.  are  not  proper  subjects  for  the  taxing 
Lwer  of  Congress.    But  it  cannot  be  admitted  that  franchises  granted  by 
Tstate  are  necessarily  exempt  from  taxation;  for  franchises  are  property, 
often  very  valuable  and  productive  property;  and  when  not  conferred  for 
the  purpose  of  giving  effect  to  some  reserved  power  of  a  state  seem  to  be 
as  oroperly  objects  of  taxation  as  any  other  property.  ,     ^        . .        , 

"But  in  the  case  before  us  the  object  of  taxation  is  not  the  j^a^^j^^^*^^^^ 
the  bank,  but  property  created  or  contracts  made  and  issued  «nd«ir  the 
franchise,  or  power  to  issue  bank  bills.    A  railroad  ^^^'"Pf  ^'/f^^^V^;^^^ 
cise  of  its  corporate  franchises,  issues  freight  receipts,  bills  of  lading,  and 
passenger  tickets;  and  it  cannot  be  doubted  that  the  orpnization  of  rad- 
roads  is  quite  as  important  to  the  state  as  the  orgamzation  of  banks.  But 
it  will  hardly  be  questioned  that  these  contracts  of  the  company  are  ob- 
jects of  taxation  within  the  powers  of  Congress,  and  not  exempted  by  any 
relation  to  the  state  which  granted  the  charter  of  the  railroad.     And  it 
seems  difficult  to  distinguish  the  taxation  of  notes  issued  for  circiUation 
from  the  taxation  of  these  railroad  contracts.    Both  descriptions  of  con- 
tracts are  means  of  profit  to  the  corporations  which  issue  them;  and  both, 
as  we  think,  may  properly  be  made  contributory  to  the  public  revenue. 

(pp.  547,  548.)  ,       ^       ,  . 

It  is  true  that  the  decision  in  the  Veazie  Bank  case  was  also  placed,  in  a 
measure,  upon  the  authority  of  the  United  States  to  control  the  circulating 
medium  of  the  country,  but  the  force  of  the  reasoning,  which  we  have 
quoted,  has  not  been  denied  or  departed  from. 

In  Thomas  vs.  United  States,  192  U.  S.,  supra,  a  federal  tax  on  the 
transfer  of  corporate  shares  in  state  corporations  was  upheld  as  a  tax 
upon  business  transacted  in  the  exercise  of  privileges  afforded  by  the  state 
laws  in  respect  to  corporations. 

In  Nicol  vs.  Ames,  173  U.  S.  509,  a  federal  tax  was  sustained  upon  the 
enjoyment  of  privileges  afforded  by  a  board  of  trade  incorporated  by  the 
State  of  Illinois. 

When  the  Constitution  was  framed  the  right  to  lay  excise  taxes  was 
broadly  conferred  upon  the  Congress.  At  that  time  very  few  corpora- 
tions existed.  If  the  mere  fact  of  state  incorporation,  extending  now  to 
nearly  all  branches  of  trade  and  industry,  could  withdraw  the  legitimate 
objects  of  federal  taxation  from  the  exercise  of  the  power  conferred,  the 
result  would  be  to  exclude  the  national  government  from  many  objects 
upon  which  indirect  taxes  could  be  constitutionally  imposed.  Let  it  be 
supposed  that  a  group  of  individuals,  as  partners,  were  carrying  on  a 
business  upon  which  Congress  concluded  to  lay  an  excise  tax.  If  it  be 
true  that  the  forming  of  a  state  corporation  would  defeat  this  purpose, 
by  taking  the  necessary  steps  required  by  the  state  law  to  create  a  cor- 
poration and  carrying  on  the  business  under  rights  granted  by  a  state 

425 


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Accountancy  Pmbiems  and  Soluti 


ons. 


h 


stattile,  tlie  federal  tax  would  become  invalid  and  that  source  of  nof,v.«.i 
reventie  be  destroyed,  except  as  to  the  businelt  fh!  L  T  .  ?f  national 
or  partnershio^     u  rln««f  k  ^"«  business  in  the  hands  of  individuals 

knZTZdlL^Tu  '^^^^*^,"«*«  ^^t'"ff  "icier  state  authority  to  thus 

impair  and  hmit  the  exertion  of  authority  whiVti  tno..  k»  ^..    / 1  . 
tional  existence.  «inomy  which  may  be  essential  to  na- 

iJlT\  "T^f  ^"  ^""'^  ^'^""*  ^^-  United  States.  190  U   S   4,7   is 
important    In  that  case  it  was  held  that  the  airents  of  Z  1.. 
ment.  carrying  on  the  busine«  of  e-.ni-  .  ^^®  ^^*^  Rovern- 

lialilJ  t«  ..I  fi.  7  owsmess  of  sellmg  liquor  under  state  authority  were 
liable  to  pay  the  interna  revenue  tax  imno^M  w  ♦!,«  f^A^  «*"uiuruy,  were 
In  the  opinion  previous  case«  I  fkT  T  ^  *^  ^^''^'^*  government, 
be  d>rf«l^  .^  previous  cases  in  this  court  were  reviewed,  and  the  rule  to 
be  deduced  therefrom  stated  to  be  that  the  i.ir«.»t,nf;^«  If  *  *  ruie  to 
and  instrumentalities  from  n-.Hon!!  ?  ?  exempt  on  of  state  agencies 
«f^;^#i  ""<»""es  trom  national  taxation  was  1  m  ted  to  those  of  a 

«r^Iy  governmental  character,  and  did  not  extend  to  those  used  by  he 
state  m  earning  on  business  of  a  private  character.    (,„  U   S  460 

„™S,  T^.""'*'  '"  ex^Pting  from  federal  taxation  the  means  imd  in 
stnunentalities  emploved  in  carrvmn.  „_  «..  uic  means  and  in- 

the  «f=.f.     Ti,         »'"/™  '"  carrying  on  the  governmenta    operations  of 
the  state.    The  exerase  of  snch  righte  as  the  establishment  of  a  !.,HW=.™ 
the  employment  of  officers  to  administer  and  exec"e  Uws  and  t^^n7; 
governmental  fm,ctions  cannot  be  taxed  by  the  federal  gove™    T^l 
Collector  T,.,.  Day,  „  Wait  ,,3;  United  States  vs  R  R   PnTw  1/ 
Ambrosini  vs.  United  States.  ,87  U.  S.  i  )  '    '  ^""-  *"  = 

But  this  limitation  has  never  been  extended  to  the  exclusion  „f  ,1. 

though  the  power  to  exercise  them  is  derived  from  ,„  ,.,^7-  ' 

by  one  of  the  states.    We   thereforl   rZll  .     •     '  '"^T^"""- 

fact  that  the  h.„in.„  t,     J  tnerelore,  reach  the  conclusion  that  the  mere 

sLte  fa  thP  ™ ',  f  "^  "  '^°^  '"  P"""»"ce  of  authority  granted  by  a 

state  m  the  creation  of  private  corporations  does  not  exemot  it  frrl  fi,! 
exe^ise  of  federal  authority  to  levy  excise  taxes  ^ns^pri^^es' 

thft   ;  iLlLTr^  *''  ^="'°"  ''^  '"  ""«•">'  »"«>  "bitrary  in  the  fact 

.0  place  ,  beyond'theT^ri^  1^""^''^^:^  'a^ :tt" 
^n.^r^an'rin^""  "•"".*^  ='""°"*^  co^rr'^^T^foi^ty'' iTa;" 

4  "aT^r-Lrtratirs  xzt^:  xir^tr  b": 

'^St^°  ^"^Jedtd-^J  ^^oihout  t^irrE^^^^ 

In  levying  excise  taxes  the  most  ample  authority  has  been  reco«,i.ed 
from  the  beginning  to  select  some  and  omit  other  nL^ti  t"  ^f ^^o^^zed 
ation  tn  celerf  /^«t  ^-.11  •  7      ?  "  *^^"^'^  possible  subjects  of  tax- 

riT;   ^    I  *'^*'"«^  ^^  ^"^*  *"°**'^'-'  *o  tax  one  class  of  orooertv 

tojhejnargin.  decided  in  this  court,  upholding  the  power.* 

•Hylton  w.  United  St«t«,  3  Dal.   ,7,   (a  t«  on  cama««i  ^h.vi.  *u 
for  private  tite);  Niml  w.  Ames.  173  U    S    Z  ^  ^rnag^  which  the  owner  kept 

'^•"w,  173  u.  5.  S09  (a  tax  upon  sales  or  exchanges  of 


Appendix. 

Many  instances  might  be  given  where  this  court  has  sustained  the  right 
of  a  state  to  select  subjects  of  taxation,  although  as  to  them  the  Four- 
teenth Amendment  imposes  a  limitation  upon  state  legislatures,  requiring 
that  no  person  shall  be  denied  the  equal  protection  of  the  laws.  See  some 
of  them  noted  in  the  margin.* 

In  Bell's  Gap  R.  R.  Co.  vs.  Pennsylvania,  134  U.  S.  232,  dealing  with  the 
Fourteenth  Amendment,  which  in  this  respect  imposes  limitations  only  on 
state  authority,  this  court  said: 

"  The  provision,  in  the  Fourteenth  Amendment,  that  no  state  shall  deny 
to  any  person  within  its  jurisdiction  the  equal  protection  of  the  laws,  was 
not  intended  to  prevent  a  state  from  adjusting  its  system  of  taxation  in 
all  proper  and  reasonable  ways.     It  may,  if  it  chooses,  exempt  certain 


boards  of  trade);  Knowlton  vs.  Moore,  178  U.  S.  41  (a  tax  on  the  transmission  of 
property  from  the  dead  to  the  living);  Treat  vs.  White,  181  U.  S.  264  (a  tax  on 
agreements  to  sell  shares  of  stock,  denominated  "  calls,"  by  stock  brokers) ;  Patton  vs. 
Brady,  184  U.  S.  608  (a  tax  on  tobacco  manufactured  for  consumption,  and  imposed 
at  a  period  intermediate  the  commencement  of  manufacture  and  the  final  consump- 
tion of  the  article);  Cornell  vs.  Coyne,  192  U.  S.  418  (a  tax  on  "  filled  cheese"  man- 
ufactured expressly  for  export);  McCray  vs.  United  States,  195  U.  S.  27  (a  tax  on 
oleomargarine  not  artifically  colored,  a  higher  tax  on  oleomargarine  artificially 
colored,  and  no  tax  on  butter  artifically  colored);  Thomas  vs.  United  States,  19a 
U.  S.  363  (a  tax  on  sales  of  shares  of  stock  in  corporations);  Pacific  Insurance  Co. 
vs.  Soule,  7  Wall,  423  (a  tax  upon  the  amounts  insured,  renewed,  or  continued  by 
insurance  companies  upon  the  gross  amounts  of  premiums  received  and  assess- 
ments  made  by  them,  and  also  upon  dividends,  undistributed  sums,  and  incomes); 
Veazie  Bank  vs.  Fenno,  8  Wall.  533  (a  tax  of  ten  per  centum  on  the  amount  of  the 
notes  paid  out  of  any  state  bank,  or  state  banking  association);  Scholey  vs. 
Rew,  23  Wall.  331  (a  tax  on  devolutions  of  title  to  real  estate);  Spreckels  vs. 
Sugar  Refining  Company,  192  U.  S.  397  (a  tax  on  the  gross  receipts  of  corpora- 
tions and  companies,  in  excess  of  $250,000,  engaged  in  refining  sugar  or  oil); 
Railroad  Co.  vs.  Collector,  100  U.  S.  S93  (a  tax  laid  in  terms  upon  the  amounts 
paid  by  certain  public  service  corporations  as  interest  on  their  funded  debt, 
or  as  dividends  to  their  stockholders,  and  also  on  "  all  profits,  incomes  or  gains  of 
such  company,  and  all  profits  of  such  company  carried  to  the  account  of  any  fund, 
or  used  for  construction."  Held  to  be  a  tax  upon  the  company's  earnings  and  there- 
fore essentially  an  excise  upon  the  business  of  the  corporation) ;  Springer  vs.  United 
States,  102  U.  S.  586  (a  duty  provided  by  the  internal  revenue  acts  to  be  assesseil* 
collected,  and  paid  upon  gains,  profits,  and  incomes,  held  to  be  an  excise  or  duty 
and  not  a  direct  tax). 

*  Beers  vs.  Glynn,,  211  U.  S.  477  (a  State  tax  on  personalty  of  non-resident  dece- 
dents who  owned  realty  in  the  State);  Hatch  vs.  Reardon,  204  U.  S.  152  (a  State  tax 
on  the  transfers  of  stock  made  within  the  State) ;  Armour  Packing  Company  vs.  Lacy, 
200  U.  S.  226  (a  state  license  tax  on  meat  packing  houses.  A  foreign  corporation 
selling  its  products  in  the  state,  but  whose  packing  establishments  are  not  situated 
in  the  state,  is  not  exempt  from  such  license  tax);  Savannah,  Thunderbolt  &  Isle 
of  Hope  Railway  vs.  Savannah,  198  U.  S.  392  (a  classification  which  distinguishes 
between  an  ordinary  street  railway  and  a  steam  railroad,  making  an  extra  charge 
for  local  deliveries  of  freight  brought  over  its  road  from  outside  the  city,  held,  not 
to  be  such  a  classification  as  to  make  the  tax  void  under  the  Fourteenth  Amend- 
ment); Cook  vs.  Marshall  County,  196  U.  S.  261  (a  state  tax  on  cigarette  dealers); 
Magoun  vs.  Illinois  Trust  &  Savings  Bank,  170  U.  S.  283  (upholding  the  graded  in- 
heritance tax  law  of  Illinois);  Bell's  Gap  Railroad  Co.  vs.  Pennsylvania,  134  U.  S. 
332  (state  tax  upon  the  nominal  face  value  of  bonds,  instead  of  their  actual  value, 
held,  a  valid  part  of  the   state  system  of  taxation). 

427 


Accmnimcy  Problems  and  SoiuHons, 

cbsws  of  property  from  any  taxation  at  all,  such  as  churches,  libraries, 
and  the  property  of  charitable  institutions.  It  may  impose  different  sue- 
cific  taxes  »pon  different  trade,  and  professions,  and  may  vary  the  rates  M 
excise  upon  various  products;  it  may  tax  real  estate  and  personal  prop- 
erty in  a  different  manner;  it  may  tax  visible  property  only,  and  not  tax 
••curities  for  payment  of  money ;  it  may  allow  deductions  for  indebted- 
ness, or  not  allow  them.  All  such  regulations,  and  those  of  like  character, 
so  long  as  they  proceed  within  reasonable  limits  and  general  usage,  are 
within  the  discretion  of  the  state  legislature,  or  of  the  people  of  the  state 
in  framing  their  Constitution/' 

It  is  insisted  in  some  of  the  briefs  assailing  the  validity  of  this  tax  that 
these  cases  have  been  modified  by  Southern  R.  R.  Co.  vs.  Greene,  216 
V.  S.  400.  In  that  case  a  corporation  organized  in  a  state,  other  than 
Alabama,  came  into  that  state  in  compliance  with  its  laws,  paid  the  license 
tax  and  property  tax  imposed  upon  other  corporations  doing  business  in 
the  state,  and  acquired  under  direct  sanction  of  the  laws  of  the  state  a 
large  amount  of  property  therein,  and,  when  it  was  attempted  to  subject 
it  to  a  further  tax  on  the  ground  that  it  was  for  the  privilege  of  doing 
business  as  a  foreign  corporation,  when  the  same  tax  was  not  imposed 
upon  state  corporations  doing  precisely  the  same  business,  in  the  same 
way,  it  was  held  that  the  attempted  taxation  was  merely  arbitrary  clas- 
sification and  void  under  the  Fourteenth  Amendment.  In  that  case  the 
foreign  corporation  was  doing  business  under  the  sanction  of  the  state 
laws  no  less  than  the  local  corporation ;  it  had  acquired  its  property  under 
sanction  of  those  laws ;  it  had  paid  all  direct  and  indirect  taxes  levied 
against  it,  and  there  was  no  practical  distinction  between  it  and  a  state 
corporation  doing  the  same  business  in  the  same  way. 

In  the  case  at  bar  we  have  already  discussed  the  limitations  which  the 
Constitution  imposes  upon  the  right  to  levy  excise  taxes,  and  it  could  not 
be  said,  even  if  the  principles  of  the  Fourteenth  Amendment  were  ap- 
plicable in  the  present  case,  that  there  is  no  substantial  difference  between 
the  carrying  on  of  business  by  the  corporation  taxed  and  the  same  busi- 
ness when  conducted  by  a  private  firm  or  individual.  The  thing  taxed  is 
not  the  mere  dealing  in  merchandise,  in  which  the  actual  transactions 
may  be  the  same,  whether  conducted  by  individuals  or  corporations,  but 
the  tax  is  laid  upon  the  privileges  which  exist  in  conducting  business  with 
the  advantages  which  inhere  in  the  corporate  capacity  of  those  taxed,  and 
which  are  not  enjoyed  by  private  firms  or  individuals.  These  advantages 
are  obvious,  and  have  led  to  the  formation  of  such  companies  in  nearly 
all  branches  of  trade.  The  continuity  of  the  business,  without  interruption 
by  death  or  dissolution,  the  transfer  of  property  interests  by  the  disposi- 
tion of  shares  of  stock,  the  advantages  of  business  controlled  and  man- 
aged by  corporate  directors,  the  general  absence  of  individual  liability, 
these  and  other  things  inhere  in  the  advantages  of  business  thus  con- 
ducted, which  do  not  exist  when  the  same  business  is  conducted  by  pri- 
vate individuals  or  partnerships.    It  is  this  distinctive  privilege  which  is 

4^8 


Appendix. 

the  subject  of  taxation,  not  the  mere  buying  or  selling  or  handling  of 
goods  which  may  be  the  same,  whether  done  by  corporations  or  individuals. 

It  is  further  contended  that  some  of  the  corporations,  notably  insurance 
companies,  have  large  investments  in  municipal  bonds  and  other  non- 
taxable securities,  and  in  real  estate  and  personal  property  not  used  in 
the  business,  that  therefore  the  selection  of  the  measure  of  the  income 
from  all  sources  is  void,  because  it  reaches  property  which  is  not  the  sub- 
ject of  taxation— upon  the  authority  of  the  Pollock  case,  supra.  But  this 
argument  confuses  the  measure  of  the  tax  upon  the  privilege,  with  direct 
taxation  of  the  estate  or  thing  taxed.  In  the  Pollock  case,  as  we  have 
seen,  the  tax  was  held  unconstitutional,  because  it  was  in  effect  a  direct 
tax  on  the  property  solely  because  of  its  ownership. 

Nor  does  the  adoption  of  this  measure  of  the  amount  of  the  tax  do  vio- 
lence to  the  rule  laid  down  in  Galveston,  Harrisburg  &  San  Antonio  Ry. 
Co.  vs.  Texas,  210  U.  S.  217,  nor  the  Western  Union  Tel.  Co.  vs.  Kansas, 
216  U.  S.  1.  In  the  Galveston  case  it  was  held  that  a  tax  imposed  by  the 
State  of  Texas,  equal  to  one  per  cent,  upon  the  gross  receipts  "  from  every 
source,  whatever,"  of  lines  of  railroad  lying  wholly  within  the  state,  was 
invalid  as  an  attempt  to  tax  gross  receipts  derived  from  the  carriage  of 
passengers  and  freight  in  interstate  commerce,  which  in  some  instances 
was  much  the  larger  part  of  the  gross  receipts  taxed.  This  court  held 
that  this  act  was  an  attempt  to  burden  commerce  among  the  states,  and 
the  fact  that  it  was  declared  to  be  "equal  to"  one  per  cent,  made  no 
difference,  as  it  was  merely  an  effort  to  reach  gross  receipts  by  a  tax  not 
even  disguised  as  an  occupation  tax,  and  in  nowise  helped  by  the  words 
**  equal  to."  In  other  words,  the  tax  was  held  void,  as  its  business  and 
manifest  intent  was  to  tax  interstate  commerce  as  such. 

In  the  Western  Union  Telegraph  cases  the  state  undertook  to  levy  a 
graded  charter  fee  upon  the  entire  capital  stock  of  one  hundred  millions 
of  dollars  of  the  Western  Union  Telegraph  Company,  a  foreign  corpora- 
tion, and  engaged  in  commerce  among  the  states,  as  a  condition  of  doing 
local  business  within  the  State  of  Kansas.  This  court  held,  looking  through 
forms  and  reaching  the  substance  of  the  thing,  that  the  tax  thus  imposed 
was  in  reality  a  tax  upon  the  right  to  do  interstate  commerce  within  the 
state  and  an  undertaking  to  tax  property  beyond  the  limits  of  the  state; 
that  whatever  the  declared  purpose,  when  reasonably  interpreted,  the  nec- 
essary operation  and  effect  of  the  act  in  question  was  to  burden  interstate 
commerce  and  to  tax  property  beyond  the  jurisdiction  of  the  state,  and  it 
was  therefore  invalid. 

There  is  nothing  in  these  cases  contrary,  as  we  shall  have  occasion  to 
see,  to  the  former  rulings  of  this  court,  which  held  that  where  a  tax  is 
lawfully  imposed  upon  the  exercise  of  privileges  within  the  taxing  power 
of  the  state  or  nation,  the  measure  of  such  tax  may  be  the  income  from 
the  property  of  the  corporation,  although  a  part  of  such  income  is  de- 
rived from  property  in  itself  non-taxable.  The  distinction  lies  between 
the  attempt  to  tax  the  property  as  such  and  to  measure  a  legitimate  Ux 
upon  the  privileges  involved  in  the  use  of  such  property. 

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Accmntamy  Problems  and  Solutions. 

In  Home  Ins.  Co.  vs.  New  York,  134  U.  S.  594,  a  tax  was  sustained 
npon  the  r%ht  or  privilege  of  the  Home  Insurance  Company  to  be  a 
corporation  and  to  do  business  within  the  state  in  a  corporate  capacity, 
the  tax  being  measured  by  the  extent  of  the  dividends  of  the  corporation 
to  the  current  year  upon   the  capital  stock.     Although   a  very   large 
amoimt,  nearly  two  of  three  millions  of  capital  stock  was  invested  in 
bonds  of  the  United  States,  expressly  exempted  from  taxation  by  a  statute 
of  the  United  States,  the  tax  was  sustained  as  a  mode  of  measurement  of 
a  privilege  tax  which  it  was  within  the  lawful  authority  of  the  state  to 
impose.    Mr.  Justice  Field,  who  delivered  the  opinion  of  the  court,  re- 
viewed the  previous  cases  in  this  court,  holding  that  the  state  could  not 
tax  or  burden  the  operation  of  the  Constitution  and  of  laws  enacted  by  the 
Congress  to  carry  into  execution  the  powers  vested  in  the  General  Govern- 
ment.   Yielding  full  assent  to  those  cases,  Mr.  Justice  Field  said  of  the 
tax  then  under  consideration :  "  It  is  not  a  tax  in  terms  upon  the  capital 
stock  of  the  company,  nor  upon  any  bonds  of  the  United  States  compos- 
ing a  part  of  that  stock.    The  statute  designates  it  a  tax  upon  the  '  cor- 
porate franchise  or  business '  of  the  company,  and  reference  is  only  made 
to  its  capital  stock  and  dividends  for  the  purpose  of  determining  the 
amount  of  the  tax  to  be  exacted  each  year."    In  that  case,  in  the  course 
of  the  opinion,  previous  cases  of  this  court  were  cited  with  approval 
(Sooety  for  Savmgs  vs,  Coite.  6  Wall,  smi  Provident  Institution  vs. 
Massachusetts.  6  WaU.  611.) 

In  the  Coite  case  a  privilege  tax  upon  the  total  amount  of  deposits  in  1 
savings  bank  was  sustained,  although  $500,000  of  the  deposits  had  been 
invested  in  securities  of  the  United  States,  and  declared  by  act  of  Congress 
to  be  exempt  from  taxation  by  state  authority.  In  that  case  the  court  said  • 
Nothing  can  be  more  certain  in  legal  decision  than  that  the  privileges 
and  franchises  of  a  private  corporation,  and  all  trades  and  avocations  by 
which  the  citizens  acquire  a  livelihood  may  be  taxed  by  a  state  for  the 
support  of  the  state  government.  Authority  to  that  effect  resides  in  the 
state  independently  of  the  federal  government,  and  is  wholly  unaffected 
by  the  fact  that  the  corporation  or  individual  has  or  has  not  made  invest- 
ment in  federal  securities."  In  Provident  Institution  vs.  Massachusetts. 
supra,  a  hke  tax  was  sustained. 

It  is  therefore  well  settled  by  the  decisions  of  this  court  that  when  the 
sovereign  authority  has  exercised  the  right  to  tax  a  legitimate  subject 
of  taxation  as  an  exercise  of  a  franchise  or  privilege,  it  is  no  objection 
that  the  measure  of  taxation  is  found  in  the  income  produced  in  part  from 
property  which  of  itself  considered  is  non-taxable.    Applying  that  doctrine 
to  this  case,  the  measure  of  taxation  being  the  income  of  the  corporation 
from  all  sources,  as  that  is  but  the  measure  of  a  privilege  tax  within  the 
lawful  authority  of  Congress  to  impose,  it  is  no  valid  objection  that  this 
measure  includes,  in  part  at  least,  property  which  as  such  could  not  be 
directly  taxed.    (See  in  this  connection  Maine  vs.  Grand  Trunk  Ry    142 
U.  &  217.  as  interpreted  in  Galveston,  Harrisburg  &  San  Antonio  Ry!  Co 
m.  Texas,  210  U.  S.  217,  226.)  ^ 

430 


Appendix. 

It  is  contended  that  measurement  of  the  tax  by  the  net  income  of  the 
corporation  or  company  received  by  it  from  all  sources  is  not  only  un- 
equal but  so  arbitrary  and  baseless  as  to  fall  outside  of  the  authority  of 
the  taxing  power.  But  is  this  so?  Conceding  the  power  of  Congress  to 
tax  the  business  activities  of  private  corporations,  including,  as  in  this  case, 
the  privilege  of  carrrying  on  business  in  a  corporate  capacity,  the  tax  must 
be  measured  by  some  standard,  and  none  can  be  chosen  which  will  operate 
with  absolute  justice  and  equality  upon  all  corporations.  Some  corpora- 
tions do  a  large  business  upon  a  small  amount  of  capital;  others  with  a 
small  business  may  have  a  large  capital.  A  tax  upon  the  amount  of  busi- 
ness done  might  operate  as  unequally  as  a  measure  of  excise  as  it  is  alleged 
the  measure  of  income  from  all  sources  does.  Nor  can  it  be  justly  said 
that  investments  have  no  real  relation  to  the  business  transacted  by  a  cor- 
poration. The  possession  of  large  assets  is  a  business  advantage  of  great 
value;  it  may  give  credit  which  will  result  in  more  economical  business 
methods;  it  may  give  a  standing  which  shall  facilitate  purchases;  it  may 
enable  the  corporation  to  enlarge  the  field  of  its  activities  and  in  many 
ways  give  it  business  standing  and  prestige. 

It  is  true  that  in  the  Spreckels  case,  192  U.  S.  supra,  the  excise  tax,  for 
the  privilege  of  doing  business,  was  based  upon  the  business  assets  in  use 
by  the  company,  but  this  was  because  of  the  express  terms  of  the  statute 
which  thus  limited  the  measure  of  the  excise.  The  statute  now  under 
consideration  bears  internal  evidence  that  its  draftsman  had  in  mind 
language  used  in  the  opinion  in  the  Spreckels  case,  and  the  measure  of 
taxation,  the  income  from  all  sources,  was  doubtless  inserted  to  prevent 
the  limitation  of  the  measurement  of  the  tax  to  the  income  from  business 
assets  alone.  There  is  no  rule  which  permits  a  court  to  say  that  the  meas- 
ure of  a  tax  for  the  privilege  of  doing  business,  where  income  from 
property  is  the  basis,  must  be  limited  to  that  derived  from  property  which 
may  be  strictly  said  to  be  actively  used  in  the  business.  Departures  from 
that  rule  sustained  in  this  court  are  not  wanting.  In  United  States  vs. 
Singer,  15  Wall,  iii,  an  excise  tax  was  sustained  upon  the  liquor  business, 
which  was  fixed  by  the  payment  on  an  amount  not  less  than  80  per  cent,  of 
the  toul  capacity  of  the  distillery.  Whether  such  capacity  was  used  in 
the  business  was  a  matter  of  indifference,  and  this  court  said  of  such  a 
measure: 

"  Every  one  is  advised  in  advance  of  the  amount  he  will  be  required  to 
pay  if  he  enters  into  the  business  of  distilling  spirits,  and  every  distiller 
must  know  the  producing  capacity  of  his  distillery.  If  he  fail  under 
these  circumstances  to  produce  the  amount  for  which  by  the  law  he  will 
in  any  event  be  taxed  if  he  undertakes  to  distill  at  all,  he  is  not  entitled 
to  much  consideration." 

In  Society  for  Savings  vs.  Coite,  6  Wall,  supra,  and  Provident  Institu- 
tion vs.  Massachusetts,  6  Wall,  supra,  as  we  have  seen,  the  amount  of  exdsc 
was  measured  by  the  amount  of  bank  deposits.  It  made  no  difference 
that  the  deposits  were  not  used  actively  in  the  business. 

431 


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ffi 


Accountancy  Problems  and  Solutions. 

In  Hasiilton  Compiiny  w.  Massachusetts,  6  Wall.  632,  the  tax  was  meas- 
ured by  the  excess  of  the  marlcet  value  of  the  corporation's  capital  stock 
above  the  value  of  its  real  estate  and  machinery,  and  in  this  connection 
sec  Home  Ins.  Co.  w.  New  York,  134  U.  S.  supra,  where  the  excise  was 
computed  upon  the  entire  capital  stock  measured  by  the  extent  of  the 
dividends  thereon. 

We  must  not  forget  that  the  right  to  select  the  measure  and  objects  of 
taxation  devolves  upon  the  Congress  and  not  upon  the  courts,  and  such 
selectioiis  arc  valid  unless  constitutional  limitations  are  overstepped.  "It 
is  no  part  of  the  function  of  a  court  to  inquire  into  the  reasonableness 
of  the  excise,  either  as  respects  the  amount  or  the  property  upon  which  it 
is  imposed."  (Patton  vs,  Brady,  184  U.  S.  608;  McCray  w.  United  States, 
19s  U.  S.  27,  58,  and  previous  cases  in  this  court  there  cited.) 

Nor  is  that  line  of  cases  applicable,  such  as  Brown  vs.  Maryland,  12 
Wheat-  419,  holding  that  a  tax  on  the  sales  of  an  importer  is  a  tax  on 
the  import,  and  Cook  vs.  Pennsylvania,  97  U.  S  566,  holding  a  tax  on  auc- 
tioneer's sales  of  goods  in  original  packages  a  tax  on  imports.  In  these 
cases  the  tax  was  held  invalid,  as  the  state  thereby  taxed  subjects  of  tax- 
ation within  the  exclusive  power  of  Congress. 

What  we  have  said  as  to  the  power  of  Congress  to  lay  this  excise  tax 
ii^Kises  of  the  contention  that  the  act  is  void  as  lacking  in  due  process  of 
law. 

It  is  urged  that  this  power  can  be  so  exercised  by  Congress  as  to  practi- 
cally destroy  the  right  of  the  states  to  create  corporations,  and  for  that 
reason  it  ought  not  to  be  sustained,  and  reference  is  made  to  the  declaration 
of  Chief  Justice  Marshall  in  McCuUoch  vs.  Maryland  that  the  power  to  tax 
involves  the  power  to  destroy.  This  argument  has  not  been  infrequently 
addressed  to  this  court  with  respect  to  the  exercise  of  the  powers  of  Con- 
gress.   Of  such  contention  this  court  said  in  Kmowlton  vs.  Moore,  supra: 

"This  principle  is  pertinent  only  when  there  is  no  power  to  tax  a  par- 
ticular subject,  and  has  no  relation  to  a  case  where  such  right  exists.  In 
other  words,  the  power  to  destroy  which  may  be  the  consequence  of  taxa- 
tion is  a  reason  why  the  right  to  tax  should  be  confined  to  subjects  which 
may  be  lawfully  embraced  therein,  even  although  it  happens  that  in  some 
particular  instance  no  great  harm  may  be  caused  by  the  exercise  of  the 
taxing  authority  as  to  a  subject  which  is  beyond  its  scope.  But  this  rea- 
soning has  no  application  to  a  lawful  tax,  for  if  it  had,  there  would  be  an 
end  of  all  taxation ;  that  is  to  say,  if  a  lawful  tax  can  be  defeated  because 
the  power  which  is  manifested  by  its  imposition  may  when  further  exer- 
cised be  destructive,  it  would  follow  that  every  lawful  tax  would  become 
unlawful,  and  therefore  no  taxation  whatever  could  be  levied." 

In  Veazie  Bank  vs.  Fenno,  8  Wall.  533,  supra,  speaking  for  the  court,  the 
Chief  Justice  said : 

"  It  is  iiiitsted,  however,  that  the  tax  in  the  case  before  us  is  excessive, 
and  so  excessive  as  to  indicate  a  purpose  on  the  part  of  Congress  to  destroy 

the  franchise  of  the  bank,  and  is,  therefore,  beyond  the  constitutional  power 

of  Coocress. 


Appendix. 

"The  first  answer  to  this  is  that  the  judicial  cannot  prescribe  to  the 
legislative  department  of  the  government  limitations  upon  the  exercise  of 
its  acknowledged  powers.  The  power  to  tax  may  be  exercised  oppressively 
upon  persons,  but  the  responsibility  of  the  legislature  is  not  to  the  courts 
but  to  the  people  by  whom  its  members  are  elected.  So  if  a  particular  tax 
bears  heavily  upon  a  corporation,  or  a  class  of  corporations,  it  cannot,  for 
that  reason  only,  be  pronounced  contrary  to  the  Constitution." 

To  the  same  effect :  McCray  vs.  United  States,  195  U.  S.  27.  In  the 
latter  case  it  was  said : 

".  .  .  no  instance  is  afforded  from  the  foundation  of  the  govern- 
ment where  an  act,  which  was  within  a  power  conferred,  was  declared  to 
be  repugnant  to  the  Constitution  because  it  appeared  to  the  judicial  mind 
that  the  particular  exertion  of  constitutional  power  was  either  unwise  or 
unjust." 

And  in  the  same  case  this  court  said,  after  reviewing  the  previous  cases 
in  this  court: 

"  Since,  as  pointed  out  in  all  the  decisions  referred  to,  the  taxing  power 
conferred  by  the  Constitution  knows  no  limits  except  those  expressly  stated 
in  that  instrument,  it  must  follow,  if  a  tax  be  within  the  lawful  power, 
the  exertion  of  that  power  may  be  not  judicially  restrained  because  of  the 
results  to  arise  from  its  exercise." 

The  argument,  at  last  comes  to  this :  That  because  of  possible  results, 
a  power  lawfully  exercised  may  work  disastrously,  therefore  the  courts 
must  interfere  to  prevent  its  exercise  because  of  the  consequences  feared. 
No  such  authority  has  ever  been  invested  in  any  court.  The  remedy  for 
such  wrongs,  if  such  in  fact  exist,  is  in  the  ability  of  the  people  to  choose 
their  own  representatives,  and  not  in  the  exertion  of  unwarranted  powers 
by  courts  of  justice. 

It  is  especially  objected  that  certain  of  the  corporations  whose  stock- 
holders challenge  the  validity  of  the  tax  are  so-called  real  estate  companies 
whose  business  is  principally  the  holding  and  management  of  real  estate. 
These  cases  are  No.  415,  Cedar  Street  Company  vs.  Park  Realty  Company; 
No.  431,  Percy  H.  Brundage  vs.  Broadway  Realty  Company;  No.  443, 
Phillips  vs.  Fifty  Associates  et  al.;  No.  446,  Mitchell  vs.  Clark  Iron  Com- 
pany; No.  412,  William  H.  Miner  vs.  Corn  Exchange  Bank  et  al.;  and  No. 
457,  Cook  et  al.  vs.  Boston  Wharf  Company. 

In  No.  412,  Miner  vs.  Corn  Exchange  Bank  et  al.,  the  bank  occupies  a 
building  in  part  and  rents  a  large  part  to  tenants. 

Of  the  realty  companies,  the  Park  Realty  Company  was  organized  to 
"  work,  develop,  sell,  convey,  mortgage  or  otherwise  dispose  of  real  estate ; 
to  lease,  exchange,  hire  or  otherwise  acquire  property;  to  erect,  alter  or 
improve  buildings ;  to  conduct,  operate,  manage  or  lease  hotels,  apartment 
houses,  etc. ;  to  make  and  carry  out  contracts  in  the  manner  specified  con- 
cerning buildings  .  .  .  and  generally  to  deal  in,  sell,  lease,  ex- 
change or  otherwise  deal  with  lands,  buildings  and  other  property,  real  or 
personal,"  etc 

433 


I 


I    I: 


i 


Aecomtancy  Problems  and  Solutions. 

At  the  time  the  MM  was  filed  the  business  of  the  company  related  to  the 
Hotel  Leonori,  and  the  bill  averred  that  it  was  engaged  in  no  other  busi- 
ness except  the  management  and  leasing  of  that  hotel 

The  Broadway  Realty  Company  was  formed  for  the  purpose  of  owning, 
holding  and  managing  real  estate.  It  owns  an  office  building  and  certain 
securities.  The  office  building  is  let  to  tenants,  to  whom  light  and  heat 
are  furnished  and  for  whom  Janitor  and  similar  service  are  performed. 

The  Fifty  Associates  are  operating  under  a  charter  to  own  real  estate 
with  power  to  build,  improve,  alter,  pull  down  and  rebuild,  and  to  manage, 
exchange  and  dispose  of  the  same. 

The  Clark  Iron  Company  was  organized  under  the  laws  of  Minnesota, 
owns  and  leases  ore  lands  for  the  purpose  of  carrying  on  mining  opera- 
tions, and  receives  a  royalty  depending  upon  the  quantity  of  ore  mined. 

The  Boston  Wharf  Company  is  operating  under  a  charter  authorizing  it 
to  acquire  lands  and  flats,  with  their  privileges  and  appurtenances,  and  to 
lease  manage  and  improve  its  property  in  whatever  manner  shall  be 
deemed  expedient  by  it,  and  to  receive  dockage  and  wharfage  for  vessels 
laid  at  its  wharves. 

What  we  have  said  as  to  the  character  of  the  corporation  tax  as  an 
excise  disposes  of  the  contention  that  it  is  direct,  and  therefore  requiring 
apportionment  by  the  Constitution.  It  remains  to  consider  whether  these 
corporations  are  engaged  in  business.  "  Business  "  is  a  very  comprehensive 
term  and  embraces  everything  about  which  a  person  can  be  employed. 
Black's  Law  Diet.  158,  citing  People  vs.  Commissioners  of  Taxes,  23  N.  Y. 
242,  244  '*That  which  occupies  the  time,  attention  and  labor  of  men 
for  the  purpose  of  a  livelihood  or  profit."  Bouvier's  Law  Dictionary,  vol 
I,  p.  273. 

We  think  it  is  clear  that  corporations  organized  for  the  purpose  of  doing 
business,  and  actually  engaged  in  such  activities  as  leasing  property,  col- 
lecting rents,  managing  office  buildings,  making  investments  of  profits, 
or  leasing  ore  lands  and  collecting  royalties,  managing  wharves,  dividing 
profits,  and  in  some  cases  investing  the  surplus,  are  engaged  in  business 
within  the  meaning  of  this  statute,  and  in  the  capacity  necessary  to  make 
such  organizations  subject  to  the  law. 

Of  the  Motor  Taximeter  Cab  Company  case,  No.  432,  the  company  owns 
and  leases  taxicabs,  and  collects  rents  therefrom.  We  think  it  is  also 
doing  business  within  the  meaning  of  the  statute. 

What  we  have  already  said  disposes  of  the  objections  made  in  certain 
cases  of  life  insurance  and  trust  companies,  and  banks,  as  to  income  de- 
rived from  United  States,  state,  municipal  or  other  non-taxable  bonds. 

We  come  to  the  question,  is  a  so-called  public  service  corporation,  such 
as  The  Coney  Island  and  Brooklyn  Railroad  Company,  in  case  No.  409, 
and  the  Interhorough  Rapid  Transit  Company,  No.  442,  exempted  from' 
the  operation  of  this  statute?  In  the  case  of  South  Carolina  vs.  United 
States,  199  U.  S.  437,  this  court  held  that  when  a  state,  acting  within  its 
lawful  authority,  undertook  to  carry  on  the  liquor  business  it  did  not  with- 
draw the  agencies  of  the  state  carrying  on  the  traffic  from  the  operation 


;•  I 


Appendix. 

of  the  internal  revenue  laws  of  the  United  States.  If  a  state  may  not 
thus  withdraw  from  the  operation  of  a  federal  taxing  law  a  subject-matter 
of  such  taxation,  it  is  difficult  to  see  how  the  incorporation  of  companies 
whose  service,  though  of  a  public  nature,  is,  nevertheless,  with  a  view  to 
private  profit,  can  have  the  effect  of  denying  the  federal  right  to  reach 
such  properties  and  activities  for  the  purposes  of  revenue. 

It  is  no  part  of  the  essential  governmental  functions  of  a  state  to  provide 
means  of  transportation,  supply  artificial  light,  water  and  the  like.  These 
objects  are  often  accomplished  through  the  medium  of  private  corpora- 
tions, and,  though  the  public  may  derive  a  benefit  from  such  operations, 
the  companies  carrying  on  such  enterprises  are,  nevertheless,  private  com- 
panies, whose  business  is  prosecuted  for  private  emolument  and  advan- 
tage. For  the  purpose  of  taxation  they  stand  upon  the  same  footing  as 
other  private  corporations  upon  which  special  franchises  have  been  con- 
ferred. 

The  true  distinction  is  between  the  attempted  taxation  of  those  operations 
of  the  states  essential  to  the  execution  of  its  governmental  functions,  and 
which  the  state  can  only  do  itself,  and  those  activities  which  are  of  a 
private  character.  The  former,  the  United  States  may  not  interfere  with 
by  taxing  the  agencies  of  the  state  in  carrying  out  its  purposes ;  the  latter, 
although  regulated  by  the  state,  and  exercising  delegated  authority,  such 
as  the  right  of  eminent  domain,  are  not  removed  from  the  field  of  legiti- 
mate federal  taxation. 

Applying  this  principle,  we  are  of  opinion  that  the  so-called  pubhc 
service  corporations,  represented  in  the  cases  at  bar,  are  not  exempt  from 
the  tax  in  question.    (Railroad  Company  vs.  Peniston,  18  Wall.  5,  33-) 

It  is  again  objected  that  incomes  under  $S»ooo  are  exempted  from  the 
tax.  It  is  only  necessary,  in  this  connection,  to  refer  to  Knowlton  vs. 
Moore,  178  U.  S.  supra,  in  which  a  tax  upon  inheritances  in  excess  of 
$10,000  was  sustained.  In  Magoim  vs.  Illinois  Trust  &  Savings  Bank, 
170  U.  S.  283,  293,  a  graded  inheritance  tax  was  austained. 

As  to  the  objections  that  certain  organizations,  labor,  argricultral  and 
horticultural,  fraternal  and  benevolent  societies,  loan  and  building  asso- 
ciations, and  those  for  religious,  charitable  or  educational  purposes,  are 
excepted  from  the  operation  of  the  law,  we  find  nothing  in  them  to 
invalidate  the  tax.  As  we  have  had  frequent  occasion  to  say,  the  decisions 
of  this  court  from  an  early  date  to  the  present  time  have  emphasized  the 
right  of  Congress  to  select  the  objects  of  excise  taxation,  and  within  this 
power  to  tax  some  and  leave  others  untaxed  must  be  included  the  right 
to  make  exemptions  such  as  are  found  in  this  act. 

Again,  it  is  urged  that  Congress  exceeded  its  power  in  permitting  a 
deduction  to  be  made  of  interest  payments  only  in  case  of  interest  paid 
by  banks  and  trust  companies  on  deposits,  and  interest  actually  paid  within 
the  year  on  its  bonded  or  other  indebtedness  to  an  amount  of  such  bonded 
and  other  indebtedness  not  exceeding  the  paid-up  capital  stock  of  the  cor- 
poration or  company.  This  provision  may  have  been  inserted  with  a  view 
to  prevent  corporations  from  issuing  a  large  amount  of  bonds  in  excess 

435 


IB 


Accmmtancy  Problems  and  Solutions. 

of  the  paid-up  capital  stock,  and  thereby  distributing  profits  so  as  to  avoid 
the  tax.  Ill  any  event,  we  see  no  reason  why  this  method  of  ascertaining 
the  deductions  allowed  should  invalidate  the  act  Such  details  are  not 
wholly  arbitrary,  and  were  deemed  essential  to  practical  operation.  Courts 
cannot  substitute  their  judgment  for  that  of  the  legislature.  In  such 
matters  a  wide  range  of  discretion  is  allowed. 

The  argument  that  different  corporations  are  so  differently  circumstanced 
in  different  states,  and  the  operation  of  the  law  so  unequal  as  to  destroy 
it,  is  so  fully  met  in  the  opinion  In  Knowlton  w.  Moore,  178  U.  S.  supra, 
that  It  is  only  necessary  to  make  reference  thereto.  For  this  purpose  the 
law  operates  uniformly,  geographically  considered,  throughout  the  United 
States,  and  in  the  same  way  wherever  the  subject-matter  is  found.  A 
liquor  tax  is  not  rendered  unlawful  as  a  revenue  measure  because  it  may 
yield  nothing  in  those  states  which  have  prohibited  the  liquor  traffic  No 
more  is  the  present  law  unconstitutional  because  of  inequality  of  operation 
owing  to  different  local  conditions. 

Nor  is  the  special  objection  tenable,  made  in  some  of  the  cases,  that  the 
corporations  act  as  trustees,  guardians,  etc.,  under  the  authority  of  the  laws 
or  courts  of  the  state.  Such  trustees  are  not  the  agents  of  the  state 
government  in  a  sense  which  exempts  them  from  taxation  because  execut- 
ing the  necessary  governmental  powers  of  the  state.  The  trustees  receive 
their  compensation  from  the  interests  served,  and  not  from  the  public 
revenues  of  the  state. 

It  is  urged  in  a  number  of  the  cases  that  In  a  certain  feature  of  the 
statute  there  is  a  violation  of  the  Fourth  Amendment  of  the  Constitution, 
protecting  against  unreasonable  searches  and  seizures.  This  amendment 
was  adopted  to  protect  against  abuses  in  judicial  procedure  under  the  guise 
of  law,  which  Invade  the  privacy  of  persons  in  their  homes,  papers  and 
effects,  and  applies  to  criminal  prosecutions  and  suits  for  penalties  and 
forfeitures  under  the  revenue  laws.  (Boyd  w.  United  States,  116  U.  S. 
632.)  It  docs  not  prevent  the  issue  of  search  warrants  for  the  seizure  of 
gambling  paraphernaha  and  other  illegal  matter.  (Adams  vs.  New  York, 
192  N.  Y.  585.)  It  does  not  prevent  the  issuing  of  process  to  require  at- 
tendance and  testimony  of  witnesses,  the  production  of  books  and  papers. 
etc.  ( Interstate  Commerce  Commission  vs.  Brimson,  145  U.  S.  447 ;  Inter- 
state Commerce  Commission  vs.  Baird,  194  U.  S.  25.)  Certainly  the 
amendment  was  not  intended  to  prevent  the  ordinary  procedure  in  use  in 
many,  perhaps  most,  of  the  states  of  requiring  tax  returns  to  be  made, 
often  under  oath.  The  objection  In  this  connection  applies,  when  the  sub- 
stances of  the  argument  is  reached,  to  the  sixth  section  of  the  act,  which 
provides ; 

••  Sixth.  When  the  assessment  shall  be  made,  as  provided  in  this  section, 
the  returns,  together  with  any  corrections  thereof  which  may  have  been 
made  by  the  commissioner,  shall  be  filed  In  the  office  of  the  Commissioner 
of  Internal  Revenue  and  shall  constitute  public  records  and  be  open  to 
inspection  as  such." 


Appendix. 

An  amendment  was  made  June  17,  191  o.  which  reads  as  follows: 

"For  classifying,  indexing,  exhibiting  and  properly  caring  for  the  re- 
turns of  all  corporations,  required  by  section  thirty-eight  of  an  act  entitled 
'An  act  to  provide  revenue,  equalize  duties,  encourage  the  industries  of 
the  United  States,  and  for  other  purposes,'  approved  August  fifth,  nkie- 
teen  hundred  and  nine,  including  the  employment  in  the  District  of  Co- 
lumbia of  such  clerical  and  other  personal  services  and  for  rent  of  such 
quarters  as  may  be  necessary,  twenty-five  thousand  dollars:  Provided, 
That  any  and  all  such  returns  shall  be  open  to  Inspection  only  upon  the 
order  of  the  President  under  rules  and  regulations  to  be  prescribed  by  the 
Secretary  of  the  Treasury  and  approved  by  the  President." 

The  contention  is  that  the  above  section  as  orginally  framed  and  as 
now  amended  could  have  no  legitimate  connection  with  the  collection  of 
the  tax,  and  in  substance  amounts  to  no  more  than  an  unlawful  attempt 
to  exhibit  to  the  private  affairs  of  corporations  to  public  or  private  inspec- 
tion, without  any  substantial  connection  with  or  legitimate  purpose  to  be 
subserved  in  the  collection  of  the  tax  under  the  act  now  under  considera- 
tion. But  we  cannot  agree  to  this  contention.  The  taxation  being,  as  we 
have  held,  within  the  legitimate  powers  of  Congress,  it  is  for  that  body  to 
determine  what  means  are  appropriate  and  adapted  to  the  purposes  of  mak- 
ing the  law  effectual.  In  this  connection  the  often  quoted  declaration  of 
Chief  Justice  Marshall  in  McCulloch  vs.  Maryland,  4  Wheat.  316.  421,  is 
appropriate :  "  Let  the  end  be  legitimate,  let  it  be  within  the  scope  of  the 
Constitution,  and  all  means  which  are  appropriate,  and  which  are  plainly 
adapted  to  that  end,  and  which  are  not  prohibited,  but  are  consistent  with 
the  letter  and  spirit  of  the  Constitution,  are  constitutional." 

Congress  may  have  deemed  the  public  inspection  of  such  returns  a  means 
of  more  properly  securing  the  fullness  and  accuracy  thereof.  In  many  of 
the  states,  laws  are  to  be  found  making  tax  returns  public  documents, 
and  open  to  inspection.* 

We  cannot  say  that  this  feature  of  the  law  does  violence  to  the  constitu- 
tional protection  of  the  Fourth  Amendment,  and  this  is  equally  true  of 

*  In  Connecticut,  the  requirement  is  that  the  tax  lists  of  the  assessors  shall  be 
abstracted  and  lodged  in  the  town  clerk's  office  "  for  public  inspection."  R.  S. 
Conn.  §2310.  In  New  York,  notices  of  the  completion  of  the  assessment  rolls  must 
be  conspicuously  posted  in  three  or  more  public  places,  and  a  copy  left  in  a  speci- 
fied place,  "  where  it  may  be  seen  and  examined  by  any  person  until  the  third 
Tuesday  of  August  next  following."  Consol.  Laws  of  N.  Y.  vol.  5,  p.  5859;  Laws 
N.  Y.  1909,  c.  62,  §  36.  In  Maryland,  a  record  of  property  assessed  is  required  to  be 
kept,  and  the  valuation  thereof  with  alphabetical  list  of  owners  recorded  in  a 
book,  "  which  any  person  may  inspect  without  fee  or  reward."  Pub.  Laws  Md. 
vol,  2,  p.  1804,  §  23.  In  Pennsylvania,  it  is  provided  that  from  the  time  of  pub- 
lishing the  assessor's  returns  until  the  day  appointed  for  finally  detcrmininf 
whether  the  assessor's  valuations  arc  too  low  "  any  taxable  inhabitant  pf  the 
county  shall  have  the  right  to  examine  the  said  return  in  the  commissioncr't 
office."  Peper  &  Lewis'  Dig.  Laws  Pa.  vol.  2,  p.  4591.  §  357.  In  New  Hamp- 
shire, the  list  of  taxes  assessed  are  required  to  be  kept  in  a  book,  and  also  left  with 
the  town  clerk,  and  such  records  "shall  be  open  to  the  inspection  of  all  persons." 
Pub,  Stat.  N.  H.  1 901,  p.  214  §  5. 

437 


I    t 


Accountancy  Problems  and  Solutions. 

the  Fifth  Amendment,  protecting  persons  against  compulsory  self-incrimi- 
nating testimony.  No  question  under  the  latter  amendment  properly  arises 
in  these  cases,  and  when  circumstances  are  presented  which  invoke  the  pro- 
tection of  that  amendment  and  raise  questions  involving  rights  thereby 
secured  it  will  be  time  enough  to  decide  them.  And  so  of  the  argument 
that  the  penalties  for  the  non-payment  of  the  taxes  are  so  high  as  to  violate 
the  Constitution.  No  case  is  presented  involving  that  question,  and,  more- 
over, the  penalties  are  clearly  a  separate  part  of  the  act,  and  whether  col- 
lectible or  not  may  be  determined  in  a  case  involving  an  attempt  to  enforce 
them.     (Wilcox  vs.  Consolidated  Gas  Co.,  212  U.  S.  19,  53.) 

It  has  been  suggested  that  there  is  a  lack  of  power  to  tax  foreign  cor- 
porations, doing  local  business  in  a  State,  in  the  manner  proposed  in  this 
act,  and  that  the  tax  upon  such  corporations,  being  unconstitutional,  works 
such  inequality  against  domestic  corporations  as  to  invalidate  the  law.  It 
is  sufficient  to  say  of  this  that  no  such  case  is  presented  in  the  record. 
(Southern  Railway  Co.  vs.  King,  217  U.  S.  525)  This  is  equally  true  as 
to  the  alleged  invalidity  of  the  act  as  a  tax  6n  exports,  which  is  beyond  the 
power  of  Congress.  No  such  case  is  presented  in  those  now  before  the 
court. 

We  have  noticed  such  objections  as  are  made  to  the  constitutionality  of 
this  law  as  it  is  deemed  necessary  to  consider.  Finding  the  statute  to  be 
within  the  constitutional  power  of  the  Congress,  it  follows  that  the  judg- 
ments in  the  several  cases  must  be  affirmed. 

Affirmed. 


if'. 


438 


1 


INDEX 


Page 
Accountant 

Duties  and  responsiblities  of 
a  public 225 

Accounts 

Accrued,  definition  of 212 

Adjustment  of,  in  case  of  fire .  108  ' 
Classification  and  verification 

of  good,  doubtful  and  bad.  226 

Deferred,  definition  of 212 

Kept  by  an  executor 206 

Nominal,  definition  of 212 

Summary,  definition  of 214 

Verification  of ,  by  auditor ..  .  225 

Account  Sales 

Form  of 63,  180 

Adjustment  of  Partnership  Ac- 
counts 

At  the  end  of  the  fiscal  period 

54,  III,  187 

Basis  of 168 

Upon  the  death  of  a  partner .  30,  49 
When  converted  into  a  cor- 
poration      41 

When  dissolving 90.  99 

Administration 

wSection    in    income    and    ex- 
penditure account 16 

Amalgamation  of  Corporations 

Basis  for 60  — 

Effects     on     the     rights     of 

creditors 264 

Journal  entries  for 24,  8 1 

Legal  requirements  for 263 

Problems  in 57.  78,  135 

Amortization  \ 

Definition  of 213 

Schedule  of 181 

Assessments 

Entries  for  membership 76 

Assets 

Contingent,  treatment  in  the 

balance  sheet 211 

Definition  of  contingent 211 

Estimated  realization  of 212 

On   instalment   plan,    in   the 

annual  statement 220 

Transfer  of 125, 126 

Audit 

Bank 227 

Difference  between  examina- 
tion and 227 


Page 
Audit — Continued 

Local,  of  branches;  report  on.  222 

Of  an  estate  for  a  client 221 

Objects  of 216 

Of  minutes  of  meetings 226 

Reasons  for  a  continuous ....    225 
Rules  for  a  junior  on  his  first .    220 
Working  papers  and  records 
for  a  semi-annual 220 

Auditing 

Answers 219-228 

Questions  in 216-219 

Balance  Sheet 

Definition  of  consolidated. ...   213 
{  13,  19,  22,  25,  30,  53. 

Form  of     <!   57.  69,  72.  83.  87.  95. 
l^orm  ot.    <j  ^g^  jQj^  J20,  124,  127. 

[  134,138,153.166 

Form  of  condensed 88 

Form  of  comparative 35 

Form  of  consolidated 58 

Revenue  balance  sheet 214 

Revision  by  auditor  of  word- 
ing of 224 

Skeleton  form  of 213 

Bankruptcy 

Schedules  in 215 

Bills  Payable 
.     Object  of  analysis  of  account .   220 

Bonds 

Collateral  trust 252 

Consolidated  mortgage 252 

Issue,   supervision  by  public 

service  commissions 215 

First  mortgage 252 

Precedence  of  issues 251 

Valuation  of  long-time 214 

Bond  Calculation 

Methods  of 64, 107 

Bond  Interest 

Form  of  account 39,  ">7 

Bond  Ledger 

Form  of 107 

Bonus 

For  "extra  service,"  audit  of.   224 

Journal  entry  for 24,  46 

Book  Values 

Verification  of,  by  auditor —   226 

Branch  Accounts 

Combined  balance  sheet 130 


\\ 


4» 


M 


'I 


r 


Index. 


Cantiitmd 

, ■  *  * ' 

foreign 


with. 


Brancli  Accounti 

Form  of • 

Pttililem     in, 

money 

Profit  and  loss  account .  - . 

BnmdieB  ^  . 
Audit  by  local  accountant 
Report  of  auditor  on 

Bf  ^Prwliict 

Definition  of. 


Bnge 
131 


333 

314 


Page 


CoTforation — Continued 

Right  to  execute  a  corporate 

mortgage ;  ■  • : ^57 

Rights  and  fees  of  a  foreign . .    246 
Procedure  for  a  voluntary  dis- 

solution 244»250 

Procedure  for  formation  of. .   230. 

238,  242,  248,  259 

Powers,  rights  and  duties  of .  -   238. 

254»  257 
UUra  vires  act  of  a 242,  267 


212 
223 

237 


259 
261 


327 


Cftpitml 

Definition  of •  •  •  •  • 

Expenditure,  adjustment  ot . . 

Canital  Stock  . 

Definition  of.  authonzed . . . . . 
Differentiation  between  bonds 

and 350 

F^r  what  issued 232,  230 

Meaning    of    -full-paid    and 

non-assessable    230,350 

Minimum  and  maximum. 250.  2G1 
Rights  of  corporation  to  pur- 
chase its  own •   ^57 

Cull  Account 

Reconciliation  of 319,  335 

Verification  of, *^9 

Cliarter 

Definition  of  corporate 

Forfeiture  of , .  •  •  •  • *5o« 

Check  . 

Sufficient  as  voucher • 

Commercial  Law 

Questions  and  answers  in .  229-270 

Consignments  _ 

Toumal  entnes  for 

Problem  in 

Ccnorate  Income 

Tax,,  basis  of . . .  •  •  ■ 

Corporation 

cSittses   for   mvoluntary 

solution •  •  * 

De  fctcto.  ...,....•••••••*••• 

Definitions  of ...... .  •  ••  •  •;  •  ■*  • 

Differences  between  partner- 
ship, joint  stock  company 

Distinction  between  public 
and  private 

Federal  tax  law,  decisions  re- 
flating to . . , ■ *  •  * 

Federal  tax  law,  full  text  of  . . 

Federal  tax  law,  summary  of  . 

For  what  purpose  may  it  be 
form,ed 23o>  243 

Municipal,  definition  of 261 


Cost 


Of  administration ^  '  '  5! 

Of  manufacture 97.  ^  5^ 

Of  mining  (coal) 

Of  preparation  (coal) •  • 

Of  sales 97 


133 

133 
151 


Coupon  Notes 

Definition  of 

Drafts  ^.  ^   . 

Entry  for  discounted 
Journal  entries  f or . . . 


252 


208 

.205,  208 


Drawing  Account 

Closing  of Vt'' 

Its  relation  to  profit  and  loss 
account *'^ 

Deficiency  Account 

Form  of 33t  77 


.313,333 
....     62 


dis- 


214 


25s 
251 
239 


341 

239 

396 

402 

393 


Depreciation 

Definition  of. •  •  •  •  •  •  ■  •  • 

Its  place  in  the  profit  and  loss 

statement •  •  • 

Methods  of  treatment  on  the 

books .,..'• 

Directors  ,  ^.    ,. 

Admission  of,  binding ■  - 

Conveyance    of    property    to 

themselves •    ^ 

Election  of 237.  258,  2O1 

Liability  after  dissolution ... .   204 
Liability  for  corporate  debts.    350 

Liability  for  dividends 243 

Number  of ;  l'  '  '  u'  i 

Remedy  in  case  of  breach  ot, 

duty  of • •.' • 

Right  to  make  calls  on  specifac 

StOCJt  ..«...••••••**■" 


213 
194 


211 


257 
231 


330 

259 
265 


Discount  . 

On  bonds  sold,  entry  for. . 

Dissolution  of  a  Corporation 

Procedure  for  a  voluntary. 
Reasons  for  involimtary . . 

Dissolution  of  Partnership 
Distribution  of  assets. . . 
Problem  in 


184 

944 
25s 

168, 169 

.  • »        f 


JJO' 

"Tjf I 


Index, 


Page 

Dividends 

Action  of  creditors  for  declar- 
ing  •  •  •   ^^5 

Cumulative -  - 250 

Declared  but  unpaid 182 

Determination  of 21 

Out  of  what  funds  paid .    .  260,  266 

Double  Entry 

Definition  of •  •  •   205 

Method  of  ascertaining  profits.  206 

Duties  of  Auditors 

Regarding  inventories 228 

Examination 

"Qsmk. 227 

DifiEerence  between  audit  and .   227 

Executors 

Books  and  accounts  kept  by.   206 

Claim  for  compensation. 167 

Compensation  for  specific 

legacy -^99 

Form  of  cash  book  for 207 

Statement    of    amounts    due 

beneficiaries ^ 

Statement  of  commissions  due  162 
Summary  statement  of  the. 4,  154, 

160 

Final  Accounting 

Definition  of 214 

Financial  Statement i43 

Fire  Insurance 

Adjustment  in  case  of  fire .  108,  144 

195 
Fire  Insurance  Company 

Calculation  of  reserve 175 

Determination  of  reserves  f or .     20 
Problem  in  closing  the  books 

of 20 

Foreign  Corporations 

Authority  for  doing  business . .   346 

Franchise  fee  of 246 

Goodwill 

As   basis   for   distribution   of 

capital  stock 60 

Entry  to  place  on  the  books .     33 

25,45 
Goods  in  Process 

Reconstruction  of  (in  case  of 

fire) 147 

Goods  on  Hand 

Construction   of    (in   case   of 

fire) i47»  196 

Income 

Charges  against 142, 153 

Income    and    Expenditure    Ac- 
count 

Condensed  form  of 89 

Difference  between  profit  and 

loss  account  and 179 

Form  of 16,  32,  88 


Page 
Income  and  Profit  and  Loss 

Statement  of 97.  ^33 

Incorporation 

Advantages  of 234 

Certificate  of 230 

Time  limit  of 257 

Incorporators 

■    J  1    230, 250, 

Number  required |     257,  261 

Inspection  of  Books 

By  a  holder  of  a  single  share . .    237 
Insurance  Company 

Treatment  of  bonds  on  the 

balance  sheet 223 

Verification  of  securities  of . .  .    221 
Interstate  Commerce  Commission 
Rights,  powers  and  jurisdic- 
tion of  the 265 

Inventory 

Analysis  of  (in  case  of  fire)  147.  196 

Determination  of 228 

Examination  of 228 

Overvaluation,  treatment  of.   213 
Joint  Adventure 

Leading  features  of 340,  341 

Joint  Stock  Companies 

Definition  of 2  58 

Differences  between  corpora- 
tions, partnerships  and. 240,  241 

Formation  of 268 

Journal  Entries  for 

Closing  the  books . . . .  |    ^'  go,'  108 
Opening  the  books  of  a  club . .     75 
Opening  the  books  of  a  cor- 
poration  34,  73.81, 103, 

126, 137, 164 

Transactions  of  promoter 35 

Liabilities 

Contingent,  definition  of.  .  208,  211 
Contingent,  setting  up  of .  .226,  228 
Contingent,   treatment  in  fi- 
nancial statement 208,  2 1 1 

Of  directors  after  dissolution .   264 

Of  directors  of  a  corporation  <    ^  50 

Of  the  members  of  a  defective 

corporation -  ■    251 

Of  president  of  a  corporation .    343 

r   238, 
Of  stockholders  for  debts ..  j    269, 

I    263 
Of  stockholder  for  transferred 

stock 255 

Transfer  of 125, 1 36 

Management 

Expenses  of 133.  ^57 

Maintenance  Accounts 

In  mining 119 


441 


ludes. 


Index. 


W 


I 


I 


i 


'llaiiiilactiiriqg 

And  profit  and  loss  and  in- 
come statement 14a 

And  trading  account 51 

Cost  of .     92 

Bjtpense  account 33,  34,  157 

Kning  Accounts 

Balance  sheet  of i  ao 

Maintenance  in , .  1 1.9 

Operating  statement  in 119 

Problem  m  coal 133 

Trading. , 1 19 

:i«t  Proit 

.Definition  of j la 


Election  of  corporation a 58 

Remedy  in  case  of  breach  of 

duty  of 259 

Opening  Entries 

f  24,73,  .81, 
For  corporation  books  j     1 03 ,  i  a6. 

[      137, 164 

Account,  form  ot 93 

Section   in   income   and   ex- 

penditufe  account 16. 110 

Statement,  lumber laa 

Statement,  mines 

Ornuiizfttion  Expense 

Entry  on  the  nooks 24 

Pttrtneriliip 

Amalgamation  of  partnerships 
Differences  between  corpora- 
tions, joint  stock  companies 

and 240,  .^. 

Distribution  of  assets  of 8,  99 

Division  of  profits  in 2, 187 

General,  leading  features  of/  **® 

\    241 

Limited,  leading  features  of 

Liquidation  of  a 

PirtnerBliip  Accomtt 

Adjustm.ent  of  interest  in .  . 

30.3^.47.49. 

55.90.99.  "I. 
168, 187 

.■•...«..     212 


119 


105 


54 


241 


240, 

9.41 
29 

29 


Adjustment  of  . 


Partners'  salaries'. 

Piatent 

Purchase  of 

Plant  Construction 

In  balance  sheet ,......,. . . . 

Jottm,al  entry  for. 

.Brtf«frwl.Stock 

Definition  of , , . 

Pmposition  to  actuaUy  paid 
up  capital 256 


105 
104 

252 


Preferred  Stock-Continued         ""^ 

Redemption  of 356 

Voting  rights  of 256 

Premium 

Treatment  in  the  accounts ...   23^ 
President 

Right  for  compensation. .....   254 

Prime  Cost  and  Overhead 

Charges  to 67,  14a,  151 

Private  Corporation 

Definition  of 239 

Problems 

England,  1910 . , 1 1 1 

England,  1910 138 

Illinois.  1907 14,  ao 

Illinois,  1909 •  •  49.  54 

Illinois,  1910 90 

Illinois,  191 1 149, 154 

Michigan,  1909 70,  73 

New  York,  1905 , i 

New  York,  1906 4 

New  York,  1907 7 

New  York,  1908 23,28,33,36 

New  York,  1909 42,  57,  62,  64 

New  York,  i9io..(   'f'^l*  96,99. 

I     102, 100, 108 

New  York.  191 1..  (  ^32, 135.  140, 
^,.  •    y         \    144,156.163 

Uhio,  1910 84 

Ontario  (Canada),  1907 11 

Virginia,  1910 ..............    1 14 

Profit  and  Loss 

Methods  of  ascertaining 206 

Profit  and  Loss  Account 

Form  of  banker's 41 

Form  of  consolidated 139 

Form  of ../       2  12,29.33, 

f\fu        u  152.63.123,151 

Of  branches 2 

Proof  of  correctness 212 

Profit  and  Loss  Statement 

Form  of  combined 59 

Form  of 67, 110, 11 1, 151 

Promotsr 

Profit  and  loss  account  of ... .     27 

Property  Account 

Items  in 186 

Form  of qa 

Proxy  ' 

Definition  of 237 

Public  Corporation 

Definition  of 339 

Public  Service  Commissions 

Powers 315 

Supervision     over     issue     of 
securities 315 


Pnge 
Quasi-Public  Corporation 

Definition  of 239 

Questions 

Auditing 

C.  A.  A.  of  Manitoba 340 

English,  1 910 368,378 

Illinois,  1910 282 

Massachusetts,  1910.. .  275 

New  Jersey,  1 904-1 909 299 

New  "York,  19 10 316 

New  York,  191 1 386 

Ohio,  1 910 326 

Virginia,  1910 351 

Washington,  1908 308 

Commercial  Law 

Florida,  1909 266 

C.  A.  A.  of  Manitoba,  1910. .  339, 

348.  349 
Illinois 233,  258,  267 

Illinois,  1909 257,  268 

Illinois,  1910. 281 

Maryland,  1909 250 

Massachusetts,  1910 274 

Michigan,  1908 245-249 

Michigan,  1909 255 

New  Jersey,  1 904-1 909 ....    297 

New  York,  1906 229 

New  York,  1908 243,  266 

New  York,  1909 251 

New  York 261-265 

New  York,  1910 319 

New  York,  1911 . . .  268-270,  387 

Ohio,  19 10 259,325 

Pennsylvania,  1908 237 

Rhode  Island,  1907. .  .  .  241,  242 

Virginia,  1910 353 

Washington,  1908 309 

Practical  Accounting 

C.  A.  A.  of  Manitoba,  1910.  341, 

346 

IlUnois,  1910 283,  288 

Massachusetts,  19 10. . .  .276,  270 

New  Jersey.  .904-1909. 4^,  29? 

New  York,  1910 310,315 

New  York,  191 1 380,  384 

Ohio,  1 9 10.... 321,324 

Virginia,  1910 355.  360 

Wkshington,  1908 303,  308 

Theory  of  Accounts 

Illinois,  1910 279 

Massachusetts,  1 9 10 273 

New  Jersey,  1904-1909 ....   291 

New  York,  1 9 10 317 

New  York,  1911 384 

Ohio,  19 10 328 

Virginia.  1910 352 

Washington.  1908 302 


Page 


Questions — Continued 
Banking 

C.  A.  A.  of  Manitoba,  191  o.    337 

Bookkeeping 

C.  A.  A.  of  Manitoba,  1910.  331, 

336 

English  1910.  .361,367,370,378 

Branch  Accounts 

Massachusetts,  1910 278 

Brokers'  and  Agents'  Accounts 

New  York,  1910 312 

New  York,  1911 382 

Virginia,  19 10 355 

Club  Accounts 

Illinois,  1910 284 

Cost  Accounting 

New  York,  1911 380 

Executorship 

English.  1910 370.375 

Illinois,  19 10 287 

New  York,  191 1 381 

Virginia,  1910 359 

Mathematics 

C.  A.  A.  of  Manitoba,  1910 .   330 

Mining  Accoimts 

New  York,  1910 313.314 

Partnership 

C.  A.  A.  of  Manitoba,  1910.  336, 

346 

English,  1910 375,  378 

Illinois,  1910 286 

Massachusetts,  1910 277 

Massachusetts,  1910 279 

Virginia,  1910 355 

Washington,  1908 303,  304 

Realization  and  Liquidation 
Washington,  1908 305 

Statement  of  Affairs  and  De- 
ficiency Accotmt 

Illinois,  1910 284 

Massachusetts,  1 9 1  o 276 

Washington,  1908 307 

Real  Estate 

Valuation  of,  appreciated ....    214 

Realization  Account 

Form  of 54 

Realization  and  Liquidation 

Account  of 71,  182 

Journal  entry  for 109 

Problem  in 70 

Report 

Annual,  of  a  corporation 26a 

Arrangement  of  auditor's 22a 

In  an  examination  for  merger .  227 
Forms  of.  for  corporation  tax.  395, 

409,414 


443 


Index. 


Index. 


Pass 
Report — Continued 

Penalty  for  failure  to  file 262 

Text  of  accountant's 61 


I  fW* 


H* 


II 


Calculation  of 175 

For  accrued  charges 208 

For  bad  debts,  treatment  of.  190 
For  earnings  on  investment. 94, 1 86 
For  fire  insurance  companies.     20 

For  investment 212 

For  working  capital 82,  184 

Royalty 

Joumal  entries  for 104 

On  machine  output,  treatment 

of 220 

Treatment  of  accrued 190 

Sales 

Cost  of 97 

Of  real  estate,  profit  on 212 

Scrip 

Definition  of 213 

Single  Entry 

Definition  of 205 

Method  of  ascertaining  profits  206 

Sinking  Fund 

Joumal  entries  for 15 

Specific  Legacy 

Definition  of 199 

Statement  of 

Amounts  due  beneficiaries.  .6,  i6r 

Bond  accounts 65 

Commissions  due  executors..    i6j 

Percentages 11,139 

Profit  and  loss  and  income. .  .  67,  97 
Trading  and  profit  and  loss ...    151 

Stock  Certificate 

Loss  in  case  of  forgery 257 

Stock  Corporation 

Definition  of 261 

Stock  Ledger 

Its  relation  to  general  books . .   211 

Forms  of 209,  210 

Verification  by  auditor 224 

Stock  Might 

Definition  of 213 

Is  it  negotiable 232,  234 

Who  has  prior 232 

Stockholders 

Authority  to  exchange  entire 
stock 261 

Liabilities  of,  of  a  defective 
corporation 251 

Liability  for  corporation 
debts 238,  260,  263 


Pag 
Stockholders — Continued 

Liability  for  transferred  stock.  255 
Right    m    and    to    corporate 

property 239 

Right  to  object  to  acts  of  the 

corporation 269 

Rights  with  respect    to  the 
books 260 

Stocks 

Definition  of 239 

Issue,  supervision  by  public 

service  commissions 215 

Must  they  be  paid  in  full 236 

Pledge  of 239 

Preferred 252 

Transfer  of 239,  257 

Valuation  of  dividend,  paying.  2 1 4 

Summary  Accounting  Statement 

of  the  Executor 4, 1 54,  160 

Surplus 

Appropriation  of 212 

Tax  Law 

Annual  report  for  the  corpora- 
tion   395,  409»  414 

Classification  of  corporations 
for  the 394 

Decision  of  the  Supreme  Court 
of  the  U.S.  on  the  constitu- 
tionality of  the 41 5,  438 

Decisions  on 

By  whom  returns  should  be 

made 196 

By  whom  returns  should  be 

signed 398 

Deductions  from  income. . .  399, 

400 

Depreciation 400,  401 

Exemption  of  corporations  .396, 

398 
Forms  of  protest 398 

Income        derived        from 
foreign  countries 397 

Interest    on    government 
bonds 398 

Inventories 398 

Meaning  of  ' '  calendar  year' '  397 

Meaning  of  "principal  place 
of  business" 397 

Returns     of     consolidated 
corporations 397 

Returns  of  foreign  corpora- 
tions    397 

Returns  of  subsidiary  rail- 
roads     396 

System  of  accounting 399 

What  should  be  included  in 
income 399 

AAA 

■   I  ¥ 


Page 
Tax  Law — Continued 

Deductions  from  gross  income  394 

Federal  corporation,  decisions 
relating  to 396 

Federal    corporations,    sum- 
mary of 393 

Full  text  of  the  Federal  cor- 
poration    402 

Objects  of  the  Federal  cor- 
poration     393 

Trading  Account 

Form  of 12,  29,  33, 119, 123 

Trading  and  Profit  and  Loss 

Statement 151 

Treasurer 

Authority  of 261 

Treasury  Bonds 

Treatment  of 199 


Page 
Treasury  Stock 

Definition  of 2  58 

Entry  for 82 

Value  of 184 

Theory  of  Accounts 

Answers 205,  215 

Questions  in 203,  205 

Turnover 

Statement  of  percentage  of .  1 1 , 1 74 

Ultra  Vires 

Act  of  a  corporation 242,  267 

Underwriting  Securities 

Accounts  of  members  of 39 

Problem  in 36 

Statement    of    condition    of 
afiairs  of 41 

Working  Capital 

Entry  for  reserve  for 83 

Work  in  Process 

Definition  of 3 14 


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